H&M Third-Quarter Profits Rise 4 Percent

Fast fashion retailer H&M's same-store sales fell 11 percent.

PARIS — Hennes & Mauritz AB, the world’s third-largest fashion retailer, beat expectations with a 4 percent rise in third-quarter net profit, but reported a worse-than-expected sales drop in August, reflecting a shortage of marked-down inventories.

This story first appeared in the September 25, 2009 issue of WWD.  Subscribe Today.

Without providing a specific outlook for 2009, H&M said it remains “positive toward future expansion” and accelerated its store expansion plan to open 240 stores in the full year, up from 225 previously expected.

The Swedish fast-fashion company also revealed plans to start online sales in the U.K. beginning next fall, following rival Inditex’s move to sell its cheap-chic brand Zara online in 2010. H&M’s online shop is available for customers in Sweden, Denmark, Finland, Norway, the Netherlands, Germany and Austria.

Net profit in the three months to Aug. 31 totaled 3.46 billion kronor, or $507 million, as sales excluding value-added tax advanced 12.4 percent to 27.58 billion kronor, or $4.04 billion. Dollar figures are converted at average exchange rates for the period.

Total sales in August declined 3 percent from the same period a year earlier, while same-store sales fell 11 percent, compared with analysts’ expectations of a 5 percent decline.

“We are not happy with our sales, and we are working toward improving them,” head of investor relations Nils Vinge said during a conference call.

H&M was too cautious when planning its purchasing volumes of summer garments and, as a result, this had a negative impact on sales, particularly in August. “H&M’s summer sale sold out quickly, resulting in fewer markdown items left in August compared to the market in general,” the company said.

Sales in the third quarter were satisfactory in Sweden, Norway, and Germany and in new markets like China, Japan and Russia, but business was weaker in several markets such as Spain, the U.S. and France, as the recession continued to dampen consumer spending.

“During the recession, customers have become more attracted to markdowns,” the company stated.

Nevertheless, H&M is forging ahead with further openings in the fourth quarter to boost sales, with plans to open 150 stores and close nine. The openings include a store in St. Petersburg, Russia, four stores in Tokyo and H&M’s first two stores in Florida.

At the end of August, H&M had 1,840 stores in 27 countries.

“The U.S. is the market where we plan to grow the most,” Vinge said.

Gross margin — a key indicator of a retailer’s profitability — rose to 61.6 percent in the third quarter, compared with 60.8 percent in the same quarter a year earlier, despite the effect of the strengthening of the dollar on purchase prices.

“Although the accelerated store opening program for the full year and the launch of H&M online in the U.K. are positive themes, the disappointing early autumn-winter like-for-like run rate is likely to weigh on the shares in the short term,” Citi analyst Richard Edwards wrote in a note to clients.

Shares in H&M closed 4.3 percent lower at 391 kronor, or $57.35, Thursday. H&M is controlled by the family of chief executive officer Karl-Johan Persson, grandson of founder Erling Persson.