By  on January 27, 2006

PARIS — Warm autumn weather took a toll on Hennes & Mauritz, as the Swedish fast-fashion giant came in short of analysts' expectations, reporting a 6 percent gain in fourth-quarter profits to 4.29 billion Swedish kronor, or $539 million. Dollar figures are at the average exchange rate.

H&M, Europe's biggest clothing retailer, said Thursday higher marketing costs and a sluggish start to the season drove up operating expenses in the three months through Nov. 30, but the chain's price reductions were stable with last year.

H&M said sales in December gained 14 percent, with a 4 percent like-for-like increase. In the quarter, gross profit was 10.8 billion kronor, or $1.35 billion, as gross margin reached 60 percent, up slightly from 59.9 percent last year. For the full year, revenues rose 14 percent to 61.26 billion kronor, or $8.23 billion. Meanwhile, the chain revealed a new franchise agreement to open stores in Dubai and Kuwait. The first two units are slated for this fall.

In a conference call, Nils Vinge, the firm's manager of investor relations, called the franchise deal region-specific and not part of H&M's overall expansion strategy. "This is a very interesting opportunity to enter a fast-growing region in a controlled way," said Vinge. H&M's partner in the region is Alshaya, which also has similar deals with Next, The Body Shop and Starbucks.

H&M's principal expansion markets next year will be the United States, Canada, Germany, the United Kingdom and Spain, with 150 stores slated to roll out over the next 12 months. Among the openings will be the first H&M store in Los Angeles and in the Canary Islands. Additional stores are expected to bow in and around San Francisco, where H&M opened its first stores this year and where Vinge said the company had its biggest first day of sales at a store ever. In spring 2007, H&M also will move into Slovakia, with a first unit in Bratislava.

H&M finished the year with 1,193 stores, opening 145 units and closing 20. Some analysts have criticized H&M's opening schedule as too conservative compared with its rival Inditex, the Spanish retailer that runs Zara.Inditex said it expected to open 450 new stores over the year. Vinge said the chain planned a "large-scale" expansion of its online and catalogue business as a complement to its existing store network. A first e-commerce site is slated to open in the Netherlands in fall 2006.

Commenting on the Stella McCartney collection for H&M, Vinge said the second of the chain's tie-ins with a well-known designer — the first was with Karl Lagerfeld — had given H&M more "confidence," suggesting additional collaborations would follow.

Full-year sales in the United States increased 18 percent. Vinge said H&M turned a profit in that market last year, and continued to refine its model to bring its profitability ratio in line with markets elsewhere. Other fast-growing markets for the chain included France, where sales gained 18 percent, and Spain, where sales gained 48 percent. Sales grew 10 percent in the U.K., 11 percent in Germany and 5 percent in H&M's home market of Sweden. Overall, H&M operates in 22 countries around the world.

H&M shares gained 1.3 percent in trading Thursday to close at 273 kronor, or $36.06 on the Stockholm exchange.

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