By  on January 30, 2014

PARIS — Hennes & Mauritz AB said Thursday that net profits rose 6 percent in its fiscal fourth quarter thanks to strong sales, but its gross margin came under pressure from currency fluctuations and heavy markdowns prompted by an unusually mild autumn.

The Swedish fast-fashion giant posted a profit after tax of 5.6 billion Swedish kronor, or $863.1 million, in the three months ended Nov. 30. All dollar rates are calculated at average exchange for the period to which they refer.

Foreign exchange rates and intense price competition weighed on the gross margin, a key indicator of profitability. It fell to 60.8 percent in the fourth quarter, from 61.6 percent in the same period in 2012.

H&M said sales including value-added tax in the fiscal fourth quarter rose to 42.59 billion kronor, or $6.5 billion, a 3 percent gain in comparable terms, driven by a strong performance in Asia, southern Europe and online.

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In 2013 as a whole, net sales totaled 128.6 billion kronor, or $19.72 billion, up 6.4 percent year-on-year, while net profit rose 1.7 percent to 17.1 billion kronor, or $2.63 billion. Negative currency translations shaved around 600 million kronor, or $92 million, from profits for the year.

“This is a good result considering the substantial long-term investments that we are making in areas such as IT, online, new brands and broadening our product range,” said H&M chief executive officer Karl-Johan Persson.

Looking ahead to 2014, the retailer maintained its target of increasing the number of stores by 10 percent to 15 percent a year with continued high profitability, while increasing sales in comparable units.

H&M indicated sales in January are expected to increase 15 percent in local currency terms compared with the same month last year.

“The financial year 2014 has got off to a good start, with strong sales development in December and January. Although there are still macroeconomic challenges in several of our markets, we are optimistic about 2014, which will be an exciting year with new countries and new opportunities,” Persson said.

The high-street chain surpassed 3,000 stores worldwide to end the 2012-13 fiscal year with 3,132 units, of which 2,936 were under its H&M banner; 85 COS; 79 Monki; 21 Weekday; eight & Other Stories, and three Cheap Monday. The company plans to open about 375 stores in 2014, with Australia and the Philippines set to join its existing 53 markets this year and South Africa to follow in 2015.

H&M will open flagships in cities including New York, Milan and Shanghai and sees good opportunities for expansion in Russia, Germany, Italy and Poland, head of investor relations Nils Vinge told analysts in a conference call. China is its fastest-growing market, with plans to open 80 to 90 stores there in 2014, he added.

Following the successful launch of online sales in the U.S. in August, the retailer plans to bring e-commerce to France in the spring or summer, with another three large markets to follow later this year.

COS is to open its first U.S. store in New York’s SoHo district, and will also launch online sales in the U.S. this year. In addition, COS will establish its first stores in South Korea, Australia and Switzerland. Meanwhile, & Other Stories will enter the Belgian and Dutch markets and launch online sales in Austria and Ireland.

Jyrki Tervonen, chief financial officer, said investment levels in 2014 would be higher than in 2013, though there would be “no drastic increases.”

Bernstein Research deemed the results “disappointing,” noting that both gross profit and gross margin in the fourth quarter fell below consensus forecasts.

“While there have been hints of better sales performance in recent months, we remain skeptical that H&M can deliver strong sales growth without continued investment in price. Over the long term, we remain concerned by the competitive pressure from other value apparel retailers and input cost headwinds, and expect margins will continue to fall,” it said in a research note.

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