HMRZF - H & M Hennes & Mauritz AB (publ) (HNNMY) Q2 2023 Earnings Call Transcript
2023-06-29 11:44:06 ET
H & M Hennes & Mauritz AB (publ) (HNNMY)
Q2 2023 Earnings Conference Call
June 29, 2023 08:00 AM ET
Company Participants
Nils Vinge - Head, IR
Helena Helmersson - CEO
Adam Karlsson - CFO
Conference Call Participants
Fredrik Ivarsson - ABG Sundal Collier
William Woods - Bernstein
Adam Cochrane - Deutsche Bank
Warwick Okines - BNP Paribas
Richard Chamberlain - RBC
Sreedhar Mahamkali - UBS
Nick Coulter - Citigroup
Simon Irwin - Credit Suisse
Georgina Johanan - JPMorgan
Dana Telsey - Telsey Advisory Group
Anne Critchlow - Societe Generale
Paul Rossington - HSBC
Presentation
Operator
Hello, and welcome to the H & M Conference Call for Six-Month Report for 2023. Please be advised that today's conference is being recorded. For the first part of this call, all participants will be in a listen-only mode during the speakers' presentation and afterwards, there'll be a Q&A session. [Operator Instructions]
Today, I'm pleased to present Nils Vinge, Head of Investor Relations. I will now hand you over to our speakers. So, please begin when you're ready.
Nils Vinge
Thank you, and hello, and welcome, everyone. Today, we presenting our six-month report 2023. With me in the room is our CEO, Helena Helmersson; and our CFO, Adam Karlsson. After the presentation, we will answer your questions.
So I leave, over to you, Helena.
Helena Helmersson
Thank you so much, Nils, and warm welcome to you all. Now that the second quarter is behind us, we can conclude that we have taken a number of further important steps towards our goals. We increased sales in many markets, despite reduced purchasing power. With the June almost over, we can see that the summer collections have been well received, despite unfavorable weather conditions that resulted in a late start of the season compared with last year in many markets. The external factors that influence purchasing costs continued to improve. At the same time, work on the cost and efficiency program is proceeding at full speed.
Many of the changes that we have made in recent years are starting to pay-off. We are also continuing our initiatives with even greater focus on the customer offering, and at the same time, we want to give our customers an even better experience with more inspiration and improved convenience in our physical stores and digital channels. We can clearly see that the physical store is important to our customers, and in-store sales have increased in the year-to-date, despite 300 fewer stores.
At the same time, online sales continued to develop well. Around 30% of sales are online, which is at the same level as last year. This, once again, shows the strength of having both physical and digital sales channels, which strengthen and complement each other. We are, therefore continuing our efforts to integrate the channel further to create the customer experience that is as smooth and inspiring as possible. At the same time, we are optimizing our store portfolio further to ensure that we have the right number of stores in the right locations at the right terms and with the right space.
We have a well-positioned customer offering and are fully focused on meeting customers' ever increasing expectations of affordable and sustainable fashion. Though the situation in the world around us remains tough, things are moving in the right direction in many of our areas. To reach our long-term goals for 2030, we have three main growth areas, H&M, Portfolio Brands, and New Growth & Ventures.
First and foremost, there is H&M, which is one of the world's biggest fashion destinations with several billion visits a year globally, in-store and online. We are continuing our intensive efforts within H&M to further elevate the customer experience in-store and online in order to meet customers' ever increasing expectations. We are improving the assortment and broadening the offering with more products as well as services for added convenience when customers shop with us. We are deepening our customer relationships and striving to give customers unbeatable value in the form of fashion products that are both affordable and more sustainable.
One example of this is that we are gradually increasing the proportion of sustainable and recycled materials in our products. In 2022, 84% of all materials were either recycled or made in a more sustainable way. This figure includes a 23% share of recycled materials, taken the company closer to its goal of 30% recycled materials by 2025. The third quarter has started well with increased sales in June. In the period of 1st to 27th of June, sales increased by 10% in local currencies compared with last year.
One of the main drivers was women's wear at H&M. The latest summer collections from H&M women's wear in our stores right now offer dresses and castings, as well as summer blazers in light neutral shades. Linen is still big and can be seen in most type of garments with the summer look further enhanced by high summer needs. In May, we were once again able to offer our customers a new and inspiring designer collaboration, and this time it was together with the help of Mugler. The collection showcased well-priced exceptional fashion garments and accessories for both women and men and was extremely well received.
Over the past year, we have made several investments in H&M's lifestyle brands. For example, we have continued to develop H&M Beauty, which offers a wide range of own and external brands and is developing strongly both in-stores and online. Among other things, we have developed a new store concept and an updated range in the Premium segments. The first flagship store that opened in Oslo recently received a fantastic reception.
Our expansion is taking place with the focus on increasing sales in all our channels. For a number of years, we've been making major long-term investments with an emphasis on the digital. The physical stores are still incredibly important. Customers appreciate having stores available where they can try on clothes and be inspired. The role of the physical stores has also been developed to become an important part of the supply chain, particularly as part of the last mile solutions.
Our second growth area portfolio of brands, which is COS, ARKET, Weekday, Monki, and Other Stories, increased sales by 17% in Swedish krones and 12% in local currencies in the second quarter. During the quarter, we saw, for example, continued strong sales development for COS and ARKET. COS has carried out an extensive upgrade of its assortment and strengthened its position in the Premium segment.
Our third business area, New Growth and Ventures covers new business models and investments in start-ups. We are continuing to invest in companies and to support these companies, for example, with knowledge and capital. Through a range of exciting and innovative partnerships and circular business models, we are working with entrepreneurs to create further value. Among other things, we are continuing to invest in start-ups that enable a more circular fashion industry that is in line with our focus on leading our industry towards a more sustainable future.
We currently have more than 25 holdings and we've recently led an investment round in Kintra Fibers, which has developed a bio-based polyester that is compostable and has the potential to be biodegradable too. Kintra Fibers is designed to address the environmental impact of traditional polyester at every stage from production to end-of-life.
The H&M Group's ambition is to lead the change towards achieving a circular fashion industry. We use our size and knowledge to drive positive change. In addition to investments in our own business, we therefore, provide financial support to projects that contribute to reducing emissions throughout the value chain. This is part of our goal to halve greenhouse gas emissions by 2030.
As part of this, we are working to purchase 100% renewable energy in our own operations, reduce the use of fossil fuels, and instead increased the use of renewable energy among our partners and suppliers. We recently invested in two solar facilities in Sweden and the UK that take us one step closer to reaching our ambitious climate goals.
Looking ahead, we can state, in conclusion, that despite the tough situation in the world around us, the H&M Group stands strong with a robust financial position, stable cash flow, and a well-balanced inventory. Although, the world around us remains challenging, we are seeing several areas where developments are going in the right direction. Combined with our investments and efficiency improvements, there are good pre-requisites for continued growth and improved profitability. Our goal of achieving an operating margin of 10% in 2024 remains in place.
Thank you so much everyone for listening and we will now be happy to take your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question for today comes from Fredrik Ivarsson of ABG Sundal Collier. Fredrik, your line now open. Please go ahead.
Fredrik Ivarsson
Thanks so much. Hi, everybody. One short question for me, just on cash flow. So you're reducing the stock-in-trade very impressively, obviously, down 20% in local currency terms. But working capital in total is still roughly at the same level as last year or end of last year. So could you maybe provide any guidance on what we should expect on this matter for the full year?
Adam Karlsson
Hi. Adam, here. I think it's clear to see that the inventory levels are going down, but both, of course, from selling more or productive stock, but also buying less. So I think the cash flow for Q2 and the first half year shows that we are getting more productive in our stock, but also buying less. I think that is an indication also for the potential going forward that we have started to improve the stock-to-sales ratio, and that will continue throughout the year without giving an -- exact level indication of the cash flow for the year, but we see good progress, particularly connected to the stock levels.
Fredrik Ivarsson
Okay. But we shouldn't expect any significant improvement in terms of total net working capital release. Is that sort of how we should read it?
Adam Karlsson
We think that is going to be a net positive effect of stock levels improving, but the quantification of it -- it is too early to say, as it's also affecting. Then, of course, the operating liabilities that works against the reduced stock levels so to say.
Fredrik Ivarsson
Okay. Good. Thanks.
Operator
Thank you. Our next question comes from William Woods of Bernstein. William, your line is now open. Please go ahead.
William Woods
Hi. Good afternoon. Thank you for taking the question. I've got two, if I may. The first one is on pricing into H2. How are you thinking about pricing going into the second half? What can we see that contributing? And then the second one is just on the Americas performance. Could you comment on the weakness in Q2, and how you're seeing that trend in Q3? It looks like mark down in the U.S. is going up quite heavily in terms of discounts. Any comments there? Thank you.
Helena Helmersson
When it comes to pricing, we've discussed that a lot the past quarters. We worked in a very dynamic way continuously with pricing. We're continuously monitoring each market and each product types to secure that we are the ones to offer the best value for money. And that means that we will continue to do so, of course, also in the coming quarters. So, of course, potential to do certain changes in pricing to make sure that we are competitive, but this is always a balancing act because as you also know, we're very focused on also reaching the profitability target that we've set for end of 2024 and that's kind of the balancing act that we will have to manage also continuously.
Nils Vinge
On the U.S., we have seen a customer sentiment weakening throughout the quarter. And I think that's a general industry trend. Then, it's difficult to say how that will evolve. We are confident that our offer is competitive even though the weaker trading in the market has also includes increased discounting from many of our competitors. So it's a fiercely competitive market right now with a slightly weaker overall customer sentiment that we, of course, closely monitoring to ensure that we keep our position and stay relevant to the customer.
Adam Karlsson
But our cautious comment about markdowns in the quarter is not about Americas such is more about the late start of the spring season. So we give us as an opportunity to activate more if needed.
William Woods
Understood. Thank you.
Operator
Thank you. Our next question comes from Adam Cochrane of Deutsche Bank. Adam, your line is now open. Please go ahead.
Adam Cochrane
Hey. Good morning. Two questions, if I may. I'll do one at a time. First one is on the quarterly (ph) performance. Would you be able to say how much of the SEK2 billion identified cost saving program was actually achieved in this quarter? I know, we originally were thinking of the second half of the year. Can you just sort of explain how much of that came into the second quarter? And on the cost control, above and beyond that, can you just give us some of the measures roughly that you are taking to deliver that cost performance? Thanks.
Nils Vinge
Yeah. So if we start with the cost program, Adam, I think you need to see the first half year as a whole as there are some fluctuations between the quarters. But we can see a net effect of around SEK100 million in the first half year attributed them to as an early delivery of the cost and efficiency program. Although, it is still on time and on schedule and on size level as we have previously indicated, it's just a timing question than in positive direction amounting to roughly SEK100 million for the first half year.
Then you will see to the best of our estimates, then a gradual positive impact throughout the autumn with Q3 trending in the same direction and hopefully, getting the full effect towards end of Q4 and into Q1 of 2024. And overall then, when it comes to cost control, I think it's all linked to how we manage our planning, our resource planning both in in-stores and in warehouses and also still reaping the benefits of strong renegotiations with landlords throughout the last couple of years. And a big driver of that efficiency in-stores and warehouses comes from the improved stock-to-sales ratio, where we have then more effective stock that is more efficient to handle, which helps us to although we have the headwinds when it comes to salary increases, maintain operational efficiency.
Adam Cochrane
That's great. Thank you. The second one is on price deflation. As you can see your raw material input costs et cetera., coming down significantly, do you think it's possible that you'll be able to see a period of price deflation, where you could cut prices in 2024, but still see gross margin expansion given, given the fact that your input costs and freight costs are so much lower than they were?
Helena Helmersson
Yes. That's possible. So back to what we discussed before, this is truly about balancing and the fact that we take steps towards our profitability target, but also closely monitoring the competitive landscape and purchasing power to really secure that customers can come to us to get the best value for money. So we're monitoring this continuously and balancing that we're taking steps towards our profitability target for M2024.
Adam Cochrane
That's great. Thank you. Finally, I'd like to say goodbye to Nils and thank him for all his help and time over the last few years.
Nils Vinge
Thank you, Adam.
Adam Cochrane
It's been a pleasure.
Operator
Thank you. Our next question comes from Warwick Okines of BNP Paribas. Warwick, your line is now open. Please go ahead.
Warwick Okines
Thanks. Good afternoon. I would echo that as well. Two questions from me, please. The first is on inventory and markdown. With constant currency inventory down 20% at the end of Q2, why are you expecting a slightly increased cost of markdowns in Q3? That's the first question. And the second is that you've talked about elevating the H&M brand. Could you just give a sense of where you think you are with this? For example, how active is your store environment renovation at the moment? Thank you.
Adam Karlsson
Yes. Starting with the inventory and markdown, there are two parts to it. Even though we are pleased with the direction of the stock development, we have had a slightly postponed start of the spring selling, which means that we need to see May and June together. So that's why we guide for a slightly higher activation activity now in the beginning of the quarter.
And then, secondly, our markdown -- the cost of the markdowns are also dependent on sort of the gross margin and the in prices, which means that we will probably sell quite a bit of the garments that we bought and had worse margins, which then effects technically the cost for the markdown for the quarter. So two effects, slightly sort of prolonged spring, delayed summer, and then the second one is more on the technical level, where we see that the cost will increase with the higher purchase costs that we've had in the old stock so to say.
Helena Helmersson
And when it comes to elevating the H&M brand, we are focusing on further improving the customer offer, customer experience and also doing a lot of work linked to supply chain. If we look at customer offer, we see, for example, improvements within H&M Ladies, where we can now offer a broader assortment to our customers, which is very well received. When it comes to the customer experience, we developed both digitally, but also do a lot of activities. When it comes to developing the physical stores, then making sure that we have the optimal store network.
And with that comes, of course, certain closures still when it comes to mature markets and growing in some of the newer markets, but also developing the pure formats to make sure we have the relevant format and relevant assortment wherever we have stores. So a lot of activities going on there making sure we have relevant stores across the globe. And then when it comes to the supply chain, that has to do, of course, with assortment and precision to make sure we have the right product at the right place in the right time.
Warwick Okines
Brilliant. Thank you very much.
Operator
Thank you. Our next question comes from Richard Chamberlain of RBC. Richard, your line is now open. Please go ahead.
Richard Chamberlain
Thank you very much. So, one question on nearshoring, please. What percentage is it now of your sourcing and how will that affect your FX exposures on gross margin and the buying margin?
Nils Vinge
Hi, Richard. As we discussed last time, we prefer not to give any percentage, but the direction is clear. We are increasing exposure in near markets. But this is a -- it's more of the direction than the exact percentage, so to speak. It’s part of the -- what Helena talked about before, and we see we buy more in season. It's all connected and we also see it in the inventory development.
Richard Chamberlain
Okay. Thanks, Nils. Is that concentrated in any particular area like H&M women's fashion. I mean, I know already COS gets quite a lot of products from Turkey (ph) and some more sort of quality quick response markets. So is it particularly H&M women's fashion that you're shifting some of that more to nearshore sourcing markets?
Helena Helmersson
And, actually, it's a broader initiative than that touching more or less all the different business units within H&M. But looking at where we see the greatest progress, right now, we can highlight H&M Ladies, but that is not only because of that, but also a lot of other activities that they have been doing and investing in.
Richard Chamberlain
Okay. Thank you very much.
Adam Karlsson
Thank you.
Operator
Thank you. Our next question comes from Sreedhar Mahamkali from UBS. Your line is now open. Please go ahead.
Sreedhar Mahamkali
Hi. Thanks for taking my questions. Couple of them, if I can, please. If I can just follow up on the North America point from earlier on, and you talked about slowing down throughout the quarter. Was the exit rate still positive or had it turned negative by the end of the quarter? And how should we think about the second half in terms of the market, and then what you're seeing there? That's the first question.
And secondly --
Adam Karlsson
Could you please -- we take one question at a time, please? Let's start with that one.
Sreedhar Mahamkali
Okay. Of course.
Adam Karlsson
We came out of a very, very strong quarter one for North America. And then, we see that the overall sort of sentiment has weakened and the industry is having a slightly weaker Q2 than Q1. And I think we are trending as the industry as so whole. And see now -- when summer has arrived, we also see that the response from the customers going in the right direction. So a strong Q1, a slightly weaker Q2 for a number of reasons, but a strong response for the customer throughout the summer here.
Sreedhar Mahamkali
Got you. In the current trading commentary that you provided, that reflects also a rebound in North America we assume [indiscernible]?
Adam Karlsson
That's -- it's many parts that we have the rebound. I think looking at the comps from last year, we had a weaker June in many of the Central European markets. I would say that the European markets and Central Europe that is a slightly bigger share of the current rebound.
Sreedhar Mahamkali
Okay. Thank you. Second question was just in terms of the SG&A trends a little bit more broadly, please. And what is the underlying inflation that you're seeing? I know you've referred to wage pressure a little earlier. But OpEx actually declined in Q2, 2% in local currencies versus a 3% increase in Q1. Clearly, you had some big contributions from the savings program. Was that it or have you seen something else going on in the -- within the [indiscernible] trends? Thank you.
Adam Karlsson
I think, potentially, slightly relating to the answer from before, we do see wage pressure, but we have done from operational efficiency improvement been able to mitigate -- mitigated slightly more than the wage pressure, so to say. So we were pleased that -- with that and that is based on a number of initiatives. But the primary driver is then the efficiency. When it comes to the stock and the productivity of the stock gets the product at the end of the day that drives profitable selling. It's very different between markets and region how the salary inflation looks. So it's not a one-size fits all answer to it. But as a general answer then, our operational efficiency has been able to mitigate wage inflation and a bit more then.
Sreedhar Mahamkali
Okay. Thank you.
Operator
Thank you. Our next question comes from [indiscernible] your line is now open. Please go ahead.
Unidentified Participant
Good afternoon, and thank you for taking my questions. First question would be one of the biggest margin clearance in fashion online retailing is the return rate. What is the average return rate at H&M? And how did the introduction of return seeds in several markets affect consumer behavior and return rate in these markets?
Helena Helmersson
So when it comes to returns without giving a clear figure, we know that we are in a good level, if comparing with competition. We do many different activities to kind of reduce the level of returns from the beginning, such as, for example, guidance when it comes to sizing or reliability when it comes to sizing so that customers hopefully wouldn't want to return once they have ordered. And that's kind of the most important part of that agenda. We have also started to roll out a fee for sending in returns. We have covered rather big part of Europe when it comes to non-members, and then also when it comes to H&M members. We are continuously rolling it out to more countries, first of all within Europe. So I would say, that that is going rather well, but put even more emphasis on trying with other means to decrease the rate of returns that's where the focus is.
Unidentified Participant
Thank you. Next question would be, you mentioned the strong performance of the portfolio brands. On the other hand, to me that means that main brand H&M is not growing. Why is that and what measures do you take in order to grow again?
Helena Helmersson
Well, looking into the quarter, and rightly so that the portfolio of brands have done well, looking into the quarter. Looking into H&M, we also see that on rather big markets, we've had a delay of the summer season start due to the weather. So that has hit since it's on big markets. On the other hand, we see that we can capture parts of that then in June, once the warmer weather has arrived. But that has been on rather big markets within Central Europe and also North America. And North America, of course, as Adam said earlier, we've also seen reduced purchasing power with our customer groups. So mainly it's related to these countries and regions.
Unidentified Participant
Okay. So my last question would be, how is H&M doing in your biggest market Germany right, in the first-two quarters and the beginning of the third?
Adam Karlsson
We're doing well. Thank you. As you said, the most important market for us together with America is US. And as you Helena and Adam said, it was a slightly delayed start of the summer season, but have picked up well in June.
Unidentified Participant
Okay. Thanks.
Helena Helmersson
Are there any further questions?
Operator
My apologies. [Operator Instructions] Our next question for today comes from Nick Coulter of Citigroup. Nick, your line is now open. Please go ahead.
Nick Coulter
Hi. Good afternoon. Thank you for taking my questions. I'll stick to two and go one at a time, if I may. Firstly to come back on the cost efficiencies falling outside of the SEK2 billion program that you have in place. The [indiscernible] point that does look to have been a step change in underlying SG&A profile, in the second quarter. Is it possible just to flesh out what changed between the first and second quarters? And how we should think about that going forward? Should we use Q2 as a base in terms of your SG&A efficiency? That's the first one. Thank you.
Adam Karlsson
What will remain is the efficiency potential that comes then from a higher productivity in our -- in our assortment and our stock, and that will remain. And I think that is the clear distinction that we can see throughout the spring, but it's not that end of Q1 was bad, and then all of a sudden start of Q1 was good. So it's a gradual improvement that we have been planning for, and now executing on. So I think, it's wise to see it as a half year totality, but with a strong direction that we step by step take the decision -- take the steps needed to reach the long-term targets.
Nick Coulter
Those efficiencies outside of the SEK2 billion program should continue to improve for the balance of the year. There is a trajectory of improvement, excluding the SEK2 billion from what you're saying.
Adam Karlsson
The SEK2 billion are more related even though it's not only visible in the administration rose so to say in the income statement. There are also, of course, other efficiency potentials throughout the cost structure. And the majority of them are then based on having a stronger assortment with high productivity in our stock. And right now, we have a good trajectory ensuring that the quality of the inventory is good that we were able to turn that over in an effective and efficient way. Then, of course, as I mentioned before that we will have and continue to have some wage inflation headwind that we continuously, of course, work to mitigate as well as we can without compromising the customer experience.
Nick Coulter
Thank you very much. And then, secondly, if I may, just on the Nordics, and let's be quite a strong underlying performance. If you're able to pull out why that might have been a positive outlier, please?
Adam Karlsson
Happy to see that all brands are doing well. What is exceptionally well in this quarter, particularly for the Nordics and Sweden is the growth of Sellpy. So that is one sort of distinct difference that we see whereas Sellpy has become a big part of the Swedish retail, and a strong leader when it comes to e-commerce.
Nick Coulter
Are you doing anything different with respect to your merchandising or how are you looking at the store ambiance? Is there anything that you're introducing in the Nordics first?
Adam Karlsson
No, generally not. They have come far when it comes to implementation of the whole operational model and so forth. But it's not something distinctly different is just that they have, as well as Central Europe been part of our development for a long time and we can see positive effects of it.
Nick Coulter
Brilliant. Thanks so much. And, of course, best of luck to Nils. Thank you.
Nils Vinge
Thank you, Nick.
Operator
Thank you. Our next question for today comes from Simon Irwin of Credit Suisse. Simon, your line is now open. Please go ahead.
Simon Irwin
Hi. Thanks for taking my call -- question. Can you just talk a bit about the lease interest charge? I know it's not an enormous number, but it's gone up from being sub-200 a quarter to kind of 300 and now 400 a quarter. What's going on there in terms of the kind of way that your IFRS accounting is going, because, presumably, your overall kind of lease liabilities aren't increasing? So can you just talk us through what we should expect on that front?
Adam Karlsson
But, you're right. I mean there is an interest component to the lease liabilities. And, of course, with interest rates changing that affects the interest cost also in the income statement. And I -- difficult to say, how much the interest rate will continue to shift. But right now, it feels that we have reached some kind of peak of the increase, so to say, or at least a decline of the interest rate increase. So we hope that this will be a more normalization of the interest rate cost connected to IFRS going forward.
Simon Irwin
All right. Thank you. And can you just talk a little bit, particularly around the admin expense line, in particular, which was looked very elevated in 1Q, and then looked remarkably low in 2Q, when historically, it's been around 2.5. Is there a big shift in terms of some of the numbers within that expense line between the two quarters?
Adam Karlsson
There are always sort of timing and phasing effects and it's whether we sort of have some of the begin invoicing done before the end of the fiscal year before it's taken -- beginning of the next, so to say. So that affected Q1. So I think the best sort of indicator of the direction is to see the two quarters as a whole done, but with, of course, still being committed to the overall size and timing of the efficiency program. And as I mentioned before, it will gradually become more visible throughout the autumn.
Simon Irwin
And will the efficiency probably the SEK2 billion -- will that be kind of over indexed within that line, because it's, obviously, SEK2 billion on -- within the admin line is quite a large number?
Adam Karlsson
Right. So it will be a split. So as we have this sort of function based income statement, it will not only be visible in the admin roles. It will be like 30%-30% -- 40% split and around 40% of it visible in the admin role. [Multiple Speakers]
Simon Irwin
Okay. Thank you very much indeed. And Nils good luck, and thank you very much.
Nils Vinge
Thank you. Thank you, Simon.
Operator
Thank you. Our next question comes from Georgina Johanan from JPMorgan. Georgina, your line is now open. Please go ahead.
Georgina Johanan
Hi. Thanks for taking my question. I've got three, please, and I'll ask them one at a time. Just on the first one, appreciate that you're not explicitly guiding on pricing from here. But just to understand directionally in the second half of the year, should there still be some year-on-year benefit to gross margin as price increases either land or annualized, please? That was my first question.
Helena Helmersson
Okay. And so, looking into the external factors' impact on purchasing prices as we've discussed before, we see that is gradually being improved. Then, of course, that means that we have the opportunity also to look into pricing continuously to really make sure that we are the ones to have the best customer offer value for money on all the important product types. So we're reviewing that product type or product type on each of the different markets. And again, I would like to put emphasis on, of course, there is a potential to then reduce some of the prices to make sure that we're really competitive, but also we're always keeping a track on us, also taking steps towards the very important profitability target that we have for 2024.
Georgina Johanan
Thank you. And then my second question was just following on from Simon's question on the interest expense. I know the sort D&A portion of the lease charge or rather the leased portion of the D&A charge, has also moved up materially in the half by about, I think it's about 9% or so, which seems a large increase in the context of a reducing store base. Is that purely accounting as well, or is there something else going on there, please, in terms of the rent charges?
Adam Karlsson
No, there's not something else going on and it's connected to interest rates increasing and currency translation.
Georgina Johanan
Great. Thank you. And then finally, just a quick question on energy costs, because, I think, for the last couple of quarters, you've called out the drag. Are you able to quantify the impact in this quarter, please? And indeed, was it still a year-on-year drag in Q2?
Adam Karlsson
Yes, it was a year-on-year drag, but we've seen that the increased costs have sort of ease and then come down. So it's not a majority share of the cost difference in this quarter, as it's been over the last two quarters, previously. So still a drag, but not as -- not as severe as previous half year.
Georgina Johanan
Right. Thank you very much.
Adam Karlsson
Thank you.
Operator
Thank you. Our next question comes from Dana Telsey from Telsey Advisory Group. Dana, your line is now open. Please go ahead.
Dana Telsey
Hi. Good afternoon, everyone. As you think about the physical real estate foot-- hi -- do you think about the physical real estate footprint? How are you thinking about size of stores number of doors. Is it different by geography and our lease negotiation, negotiations more favorable in one region of the world than another? And just one other thing on that, how is Omnichannel advancing within your physical footprint? And Nils, you'll be missed. Thank you.
Nils Vinge
Thank you, Dana.
Helena Helmersson
Okay. Looking into optimizing the store portfolio, first of all, we see that the physical stores are very, very important, still for our customers. It's accessible. It's a way for our customers to get inspiration to try out clothes. But more, importantly, it's kind of the combination that we always talk about on digital channels and physical channels, and how those can strengthen each other. We're working on optimizing the store portfolio in many different ways.
Of course, as digital has expanded, when it comes to shopping behavior, we have, as you know, also reduced the number of stores in certain mature markets. Looking at the pace of that decline, of course, more and more work coming into more optimal levels. And we also see the opportunity to increase number of stores in parts of the world as well. Looking into how to differentiate the stores, that is a very important topic and also an important part of our plan and also investments moving forward, because it's all about having the right store format, and thereby also the right size at the right place.
So looking into the customer group around each and every store, we are also profiling the stores in different ways with having the relevant assortment for that customer group and also looking into space and interior and doing that according to the different store formats that we have developed. So that is a very important part of the plan. Refurbishment is, of course, part of that as well. You had one question in the end of Omni, not sure if I answered that. Could you please ask again?
Dana Telsey
Of course. As you think about Omnichannel and the advancements that you're doing within the physical store footprint, what are you putting in -- what are you putting in there? How you're reacting? And did you put something that you changed? Is there advancement there?
Helena Helmersson
Well, it's part of the different store formats. That's also to think about Omni, so how to make it seamless between digital and physical channels. So for example, if you want to buy something online and pick it up in-store and how to further advance that we, of course, do self-service checkouts continuously. We do a lot of work on helping customers to navigate better in our stores. So there is a lot of different activities that is kind of integrated in the different store formats all to make the whole experience more Omni and more convenient. So that is a very important part of integrating the channels.
Operator
Thank you. Our next question comes from Anne Critchlow of Societe Generale. Anne, your line is now open. Please go ahead.
Anne Critchlow
Thank you. Good afternoon, everyone. I've just got one question, please. So thinking about the gross margin, is it fair to say that FX could still be a negative impact in the third quarter, and then more neutral in the fourth quarter, but not really positive until the first half next year?
Nils Vinge
As we said, we don't guide on the gross margin, but we do help you with the external factors that are important for the input costs. And as we said in the report, there are no reversing and becoming -- from having become -- having been very negative, and gradually improving. And now they're pivoting and becoming a positive sometime in the third quarter probably. So we're going for neutral more or less for the quarter on the impact. Then the gross margin could be something else, of course. But for the fourth quarter, it looks even more than that. It's very much a tailwind for the input costs.
Anne Critchlow
Thank you very much, Nils. And good luck for the future.
Nils Vinge
Thank you.
Operator
Thank you. Our next question comes from Paul Rossington of HSBC. Paul, your line is now open. Please go ahead.
Paul Rossington
Good afternoon. It's, probably a somewhat boring question, to be honest. But you still have a significant amount of undrawn credit facilities. Other than the maturity profile of those credit facilities, is there any other reason why you now need them? And that's my question. And also just to say thank you very much to Nils for your help. Thank you.
Nils Vinge
Thank you, Paul.
Adam Karlsson
But we make sure that we have a strong liquidity and a help sort of access to cash. And we believe that given the last couple of years, we are right now on a level, where we can be sort of absorbing [indiscernible] that gives us the sort of opportunity to look forward and build for the future to say, given a robust financial situation.
Paul Rossington
Thank you.
Operator
Thank you. At this time, we currently have no further questions. So I'll hand back to Helena Helmersson for any further remarks.
Helena Helmersson
Right. So before we finish, of course, I'd like to say a big, big thank you to Nils Vinge since this is your last report with H&M Group. You are such an appreciated leader and colleague within H&M Group, and have been a key person both in the current position, of course, but also in many other positions. So a big, big thank you to you and best of luck.
Nils Vinge
Thank you, Helena, and also thank you to the audience. It's been a pleasure working with you and best of luck to all of you, and…
Helena Helmersson
Well, I'd also like to introduce then our new Head of Investor Relations, which is [indiscernible], a very warm welcome to you. From the next quarter, you will be the one that will lead the Investor Relations.
Unidentified Company Representative
Thank you. I'm very excited about the opportunity and look forward to working closely with you all and continue the very strong collaboration has had with all of you.
Helena Helmersson
Okay. So by that, a big thank you to all of you who has been participating. Have a lovely summer and a very good day. Thank you.
Operator
Thank you for joining today's call. You may now disconnect your lines.
For further details see:
H & M Hennes & Mauritz AB (publ) (HNNMY) Q2 2023 Earnings Call Transcript