By  on April 8, 2010

PARIS — Hennes & Mauritz AB, the world’s third-largest fashion retailer, saw net profits jump 45 percent in the first quarter as store openings in South Korea and Israel and an early Easter weekend boosted sales despite lingering economic doldrums.

Net profits in the three months ended Feb. 28 totaled 3.74 billion kronor, or $521 million, beating analysts’ expectations and sending the company’s shares up 5.5 percent to close at 496.50 Swedish kronor, or $68.62 at current exchange rates, on the Stockholm stock exchange on Thursday.

“We regard sales in the quarter as satisfactory in view of the continued weak economy,” said H&M investor relations manager Nils Vinge. “Looking ahead, we maintain a positive view on our future expansion. We will continue to expand in new markets and see room to grow also in existing markets.”

Total sales rose 21 percent in March versus the same month a year earlier, the company’s strongest March increase since 2007, while same-store sales were up 9 percent following a dip in February.

“The positive sales development in March should, however, also be seen in light of a positive calendar effect of approximately 2 percentage units and the fact the Easter occurred one week earlier than last year,” said Vinge, adding it was hard to quantify the impact of the holiday weekend. “The Easter [effect] will be reversed in April, which was also the strongest month last year with a like-for-like increase of 8 percent.”

Total sales were up 10 percent in February, while same-store sales fell 1 percent during the month. “In February, in most of our markets it was extraordinarily cold, and of course that affects selling of spring garments,” said Vinge.

First-quarter sales rose 13 percent in local currency to 29.09 billion kronor, or $4 billion, from 27.28 billion kronor, or $3.3 billion. Same-store sales rose by 2 percent in the quarter. Dollar figures are converted at average exchange rates for the period.

Sales in Asia, including Japan, South Korea and Russia, were up 85 percent in the first quarter versus the same period last year, said Vinge. Though the Swedish retailer undoubtedly benefited from a favorable comparison with the first quarter of 2009, gross margin — a key measure of profitability — also rose by more than expected to 61.9 percent from 56.6 percent a year earlier. Gross margin was boosted by 0.8 percentage units from currency hedging of the markup on sales of goods to subsidiaries, but increased discounting on the shop floor had a negative impact of 1.6 percentage units.

H&M reported strong interest in its first store openings in South Korea in February and Israel in March. Overall, the group opened 10 stores and closed six during the three-month period, bringing the global store tally to 1,992 versus 1,748 at the same time last year.

During the second quarter, H&M plans to open 73 stores, mainly in the U.K., China, Norway, Denmark and Germany, and close six.

It expects to open 240 stores in 2010 as a whole, though Vinge cautioned this total may not be met as conditions are tougher than last year, with many planned malls canceled or delayed due to the economic crisis. “The demand is increasing while the supply is decreasing,” he said. “The only markets really where the supply of new shopping malls is still pretty good is in China and Russia.”

The retailer plans to add H&M stores in Moscow and Saint Petersburg, and open the first stores in Hong Kong for its higher-priced COS concept and trend-driven chain Monki in the fall.

Following the success of the first H&M Home store, opened in Stockholm in the fall, the company will open home stores in Helsinki, Copenhagen and London in the fall and look for additional locations in other markets where it already offers Internet and catalogue sales.

The company plans to grow in Israel, despite recent protests in front of its stores in Stockholm and Paris by campaigners who want foreign firms to boycott Israel because they say that nation is violating the rights of Palestinians in disputed territories.

“Everyone has the right to express their opinion,” said Vinge. “We rely on recommendations from the EU and U.N., and we believe in trade rather than boycott.”

Alessandra Coppola, analyst at S&P Equity Research, upgraded her recommendation on the stock to “hold” from “sell” on expectations that full-year consensus forecasts will be raised in the wake of the better-than-expected profitability registered in the first quarter.

The H&M share price has risen by 20 percent in the year-to-date while the Stockholm stock exchange is up 9.9 percent, Coppola said in a research note. At its annual general meeting on April 29, the company’s board will propose a 2-for-1 stock split, in a move designed to make the shares more appealing to investors.

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