By  on March 31, 2011

PARIS — Hennes & Mauritz AB, the world’s third-largest fashion retailer, posted a larger-than-expected 30 percent profit drop in its fiscal first quarter as soaring cotton prices and negative currency effects sapped its gross margins.

“Instead of passing on these cost increases to customers, we chose to strengthen our price position in order to build further on our strong market position for the long term,” stated Karl-Johan Persson, chief executive officer of H&M.

During the three months ended Feb. 28, net income fell to 3.54 billion Swedish kronor, or $530 million, from 5.05 billion kronor, or $704 million, during the same period in fiscal 2010. Dollar amounts are calculated at average exchange rates for the periods in question.

In the quarter, sales fell to 24.5 billion kronor, or $3.67 billion, from 24.85 billion kronor, or $3.45 billion, during the 2010 period. This 1 percent drop reflected the strengthening of the Swedish currency against most of the currencies of the countries in which H&M operates. Sales were up 9 percent when calculated in local currencies and up 1 percent on a same-store basis, as consumption remained subdued amid heavy snowstorms in December, which forced some stores to close periodically, and aggressive discounting by other retailers.

China, the United States and the United Kingdom were the strongest performers, while sales in Switzerland, Norway, Japan and Austria were disappointing, the Swedish fast-fashion retailer reported.

“It’s a challenging consumer environment with a lot of consumers facing cost inflation, fuel prices going up, energy prices, etc. So it will be a tough environment ahead as well,” H&M chief financial officer Jyrki Tervonen said in a conference call.

H&M closed its stores in the Tokyo area for up to two weeks after the March 11 earthquake, but the impact of the disaster will only be reflected in its second-quarter figures.

Gross margin fell to 57.8 percent of sales during the fiscal first quarter from 61.9 percent a year earlier, impacted by accelerating cost inflation in sourcing markets, a reduction in spare capacity among manufacturers, higher transportation costs and a negative U.S. dollar.

“These are clearly demanding times. At the same time, we’re optimistic about the opportunities for H&M. Our plan remains to increase sales in comparable units for the full year,” Nils Vinge, head of investor relations at H&M, said in the conference call.

Sales in February were up by 9 percent in local currencies and up 1 percent on a same-store basis. Sales in local currencies during the period of March 1 to 29 rose 3 percent compared with a very strong March 2010, which included part of the Easter holidays.

H&M disclosed it would start publishing enhanced monthly sales data. Figures for February, May and August, previously published in connection with the relevant interim report, will now be broken out separately, as will December sales data.

H&M will also provide sales figures in Swedish kronor for each quarter in order to illustrate the impact of currency translations. The first of these enhanced reports will come with the May sales data, scheduled to be published on June 15.

The retailer reported that first quarter inventories rose by 29 percent year-on-year, but Vinge said it was too early to infer that markdowns would increase as a result, noting that stocks increased partly due to expansion and contained a strong selection of spring clothes.

The group opened nine stores and closed three during the three-month period, bringing the total number of stores to 2,212 as of Feb. 28, versus 1,992 at the same time last year. It plans to open 97 stores and close eight during the second quarter.

H&M last week opened its first two stores in Romania and expects to enter four additional countries in 2011 either through directly operated stores or franchises: Croatia, Morocco, Jordan and Singapore. It will also launch online sales in the United States toward the end of the year.

Separately, H&M announced that Selma Blair, Penn Badgley, Keri Hilson and Akon were among the celebrities involved in this year’s Fashion Against AIDS collection, which for 2011 is a unisex range. Items including parkas, T-shirts and jeans will go on sale on April 26, with 25 percent of sales donated to HIV/AIDS prevention projects.

Shares in H&M closed down 3.2 percent at 209.60 kronor, or $29.48, on the Stockholm stock exchange.

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