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H&M Profits Drop 10.8 Percent

Swedish retailer cites strong krona, rising purchasing costs.

PARIS — Hennes & Mauritz AB, the world’s third-largest fashion retailer, posted a surprise 10.8 percent profit drop in its fiscal fourth quarter as rising purchasing costs and negative currency effects weighed on gross margins.

This story first appeared in the January 28, 2011 issue of WWD.  Subscribe Today.

During the three months ended Nov. 30, net income fell to 5.48 billion Swedish kronor, or $810 million, from 6.15 billion kronor, or $878 million, during the same period in 2009. Dollar amounts are calculated at average exchange rates for the periods in question.

In the quarter, sales rose to 29.71 billion kronor, or $4.38 billion, from 28.01 billion kronor, or $4 billion, during the 2009 period. Sales were up 15 percent when calculated in local currencies and 7 percent on a same-store basis.

Gross margin fell to 63.2 percent of sales during the period from 66.3 percent a year earlier, negatively impacted by a reduction in spare capacity among manufacturers, higher transportation costs and the rising prices of raw materials, including a doubling of cotton prices in 2010.

“These external factors have been changing from having been a strong tailwind to a headwind,” Nils Vinge, head of investor relations at H&M, said during a conference call. “We saw the first of it now in Q4 and it will accelerate into Q1 and Q2, but the magnitude is of course very difficult to quantify.”

The retailer has also been spending more on improving its product offering, in addition to committing bigger budgets to marketing, IT and online sales during the period, he added. H&M plans to unveil a revamped Web site in spring.

In 2010 as a whole, group sales were up 15 percent in local currency terms and up 5 percent in comparable units. Net income rose to 18.68 billion kronor, or $2.6 billion, from 16.38 billion kronor, or $2.15 billion, in 2009. December same-store sales were flat as snow kept away customers in many countries.

“The economy improved from 2009 but in several countries the economic situation was still uncertain and difficult,” stated Karl-Johan Persson, chief executive officer.

Nonetheless, he said prospects for 2011 were good. “We are optimistic about the future and we plan to increase sales in comparable units in 2011,” Persson said.

H&M plans to open 250 stores in 2011, including its first units in Romania, Croatia, Morocco, Jordan and Singapore. It will also expand its online and catalogue sales, with the launch of online sales in the United States planned for the end of the year. The retailer operated 2,209 stores as of Dec. 31, 2010, versus 1,988 on Dec. 31, 2009.

Shares in H&M fell 7.3 percent to a six-month low of 212 kronor, or $32.65, on the Stockholm stock exchange.