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Weak Traffic, Markdowns Hit H&M

Second-quarter profits sank 10.8 percent to 4.66 billion Swedish kronor, or $700 million, on the back of broadly flat sales.

LONDON — Weak traffic, markdowns, currency headwinds and long-term investments in retail expansion dented second-quarter net profits at Swedish fast-fashion retailer Hennes & Mauritz.

This story first appeared in the June 20, 2013 issue of WWD.  Subscribe Today.

The company said profits in the three months to May 31 sank 10.8 percent to 4.66 billion Swedish kronor, or $700 million, on the back of broadly flat sales. All figures have been converted at average exchange rates for the respective periods.

The current quarter, however, is off to a good start with sales increasing by 14 percent in local currencies in the period from June 1 to 17 compared with the same period last year, due to a mix of full-price and summer-sale merchandise.

Shares in the company closed down Wednesday 0.1 percent at 225.10 Swedish kronor, or $34.80, at current exchange.

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“Although sales remained strong in Asia, overall sales were not satisfactory mainly due to the continued challenging situation for the fashion retail industry, as well as unfavorable weather in March and a couple of weeks into April in many of our big markets,” said Karl-Johan Persson, the company’s chief executive officer.

As reported last week, sales in the quarter dipped 0.1 percent to 31.64 billion Swedish kronor, or $4.7 billion, while sales in local currencies increased by 5 percent. Sales in comparable units, which includes stores, Web sales and catalogues in operation for at least a year, decreased by 4 percent.

H&M said the disparity between sales in local currencies and reported sales was due to the negative impact of the stronger Swedish krona against most countries’ currencies.

“This quarter has been marked by substantial negative currency translation effects, which have had a negative impact on both sales and profits in SEK,” the retailer said.

Persson added that the second quarter had been a period of “intense activity,” with the opening of nearly 100 stores, including its first South American unit in Santiago, Chile.

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Asked during a conference call whether consumers were rejecting specific categories, styles or products, the company’s investor relations manager Nils Vinge said no. “We are happy with the collections. The problem is mostly weaker footfall, due to the colder weather,” said Vinge.

He said it was the weather, too, that led to higher markdowns than planned.

Persson, who was not on the call, added in the statement that the company is continuing its “strong expansion in Asia, where we now have 200 stores and where we are now starting to establish our newer brands like COS and Monki.”

The company said that long-term investments are higher this year than last, a dedicated U.S. e-commerce site would open in August and that there was room to grow in mature markets such as Europe.

During the quarter the company opened the first seven stores of its new brand & Other Stories, in cities such as London, Paris and Milan, while COS will be expanding into Turkey and Switzerland.

“There is great potential in the growing online market. We are looking forward to launching our online sales in the U.S. in August,” said Persson. “In parallel, we are continuing our work on the global rollout of H&M’s online store, with the aim of adding several new online countries during 2014.

H&M said that in the first half, net profit fell 10.6 percent to 7.11 billion SEK, or $1.07 billion. Sales in the six months from December to May were up 0.9 percent to 60.03 billion SEK, or $9 billion. Sales in local currencies were up 5 percent, while sales in comparable units were down 4 percent.