H&M Reports Increase in Third-Quarter Profits

Swedish retailer H&M's shares fell 6.5 percent Wednesday as investors focused on a slight downturn in margins.

PARIS — Hennes & Mauritz AB, the world’s third-largest fashion retailer, generated a 22.6 percent increase in third-quarter profits, but its shares fell 6.5 percent Wednesday as investors focused on a slight downturn in margins and scaled-back store opening plans.

This story first appeared in the September 30, 2010 issue of WWD.  Subscribe Today.

During the three months ended Aug. 31, net income rose to 4.24 billion Swedish kronor, or $565 million, while sales advanced to 26.89 billion kronor, or $3.58 billion, from 23.54 billion kronor, or $3.13 billion, during the 2009 period. Sales rose 21 percent when measured in local currencies and were up 11 percent on a same-store basis.

Dollar amounts are calculated at average exchange rates for the period in question.

Gross margin receded to 60.5 percent of sales, down from 61.6 percent a year ago. On the company conference call Wednesday morning, Karl-Johan Persson, chief executive officer, emphasized the reduction reflected a 160-basis-point benefit attributable to currency-hedging activities in the third quarter of last year.

“We really would like to clarify that the gross margin is not the goal in itself and has never been,” Persson said, later adding that markdowns as a percentage of sales were flat year-over-year.

Margins were aided by the exchange rate of the U.S. dollar, excess production capacity and lower costs for transportation and raw materials. “The positive effect of these external factors have, however, gradually diminished,” Nils Vinge, head of investor relations, told analysts.

The retailer, which recently revealed it was collaborating with Lanvin designer Alber Elbaz on a collection to be launched in November, said its fall collections had been well received, with sales in the first 27 days of September up 15 percent year-over-year in local currency terms. Sales in August rose 24 percent in local currencies and 14 percent on a same-store basis.

H&M also reported the launch of online sales in the United Kingdom in September had been a success.

However, it warned that it would miss its target of 240 store openings worldwide in 2010 because the completion of some shopping malls, mainly in Southern Europe, has been halted as a consequence of the weak economy. The company expects to open 20 fewer stores as a result.

In the current fourth quarter, 140 store openings are planned as well as 10 closures. At the end of the third quarter, there were 2,078 stores in operation, including 43 under franchise arrangements.

Despite the rollback in expansion plans, Vinge said the company’s annual target of 10 to 15 percent expansion in its store base “remains intact.”

In trading on the Stockholm Stock Exchange Wednesday, shares of H&M closed at 242.30 kronor, or $35.52, down 16.70 kronor, or $2.45, a 6.5 percent pullback for the day generally attributed to lower-than-expected earnings and margins.