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PARIS — Hennes & Mauritz AB said net profits rose 22.6 percent in the fiscal second quarter as the Swedish fast-fashion retailer posted strong sales across its 44 markets and reaped the benefits of better sourcing conditions, including lower cotton prices.
This story first appeared in the June 21, 2012 issue of WWD. Subscribe Today.
Profit after financial items rose to 5.2 billion Swedish kronor, or $765 million, from 4.2 billion kronor, or $679 million, during the corresponding period last year. All dollar rates are calculated at average exchange rates for the period in question.
“The year started well and the positive trend continued in the second quarter,” said H&M chief executive officer Karl-Johan Persson. “The spring collections have been well received by our customers as shown by our increased market share in a fashion retail market that continues to be challenging.”
The gross margin remained unchanged at 61.7 percent, after coming under pressure in the first quarter due to heavy discounting of unsold merchandise and rising purchasing costs.
H&M had reported last week that sales including VAT for the period of March 1 to May 31 rose to 36.9 billion kronor, or $5.4 billion, a 12 percent gain in local currency terms. Sales in comparable units rose 2 percent.
The figures come after Spanish rival Inditex SA last week reported a 15 percent rise in sales and a 30 percent jump in net profits in its fiscal first quarter, which runs from Feb. 1 to April 30.
Nils Vinge, head of investor relations, said H&M was confident going forward.
“The fact that we continue taking market share under the challenging conditions that still prevail in many markets, with economic austerity and restrained consumption, shows not only that we have strong collections that are appreciated by our customers, but also that our business model works well also in times of economic weakness,” he told analysts in a conference call.
“We will always be exposed to external changes and we will keep our long-term focus,” he added.
H&M, whose gross margin fell by 200 basis points in the first quarter, said previously negative external factors — including cotton prices, wage inflation in sourcing countries, transportation costs and supplier capacity — had a broadly neutral impact in the second quarter.
“The U.S. dollar, our most important sourcing currency, was also relatively neutral year-on-year for the products we sold in the second quarter, but for the second half of 2012, the U.S. dollar will have a negative effect, since it has strengthened materially against most of our sales currencies,” Vinge said.
He declined to say which factors had a positive impact on the margin, but said the retailer had not increased prices.
During the second quarter, H&M recorded sales growth in virtually every market, including Southern Europe, where austerity programs have prompted households to tighten their purse strings. Sales in local currencies were up 22 percent in Greece, 15 percent in Ireland and 16 percent in Italy. They rose 2 percent in Spain and fell 4 percent in Portugal.
Vinge said H&M remained confident in Greece, where a general election last weekend ushered in the conservative, pro-bailout New Democracy party. Carrefour SA, the world’s second-largest retailer after Wal-Mart Stores Inc., said last week it was pulling out of Greece as a result of the country’s prolonged economic crisis.
“We continue to invest in Greece and we continue to expand, and that is the biggest driver,” Vinge said.
H&M maintained its plan to open around 275 stores worldwide in 2012, with a focus on China, the U.S. and the U.K. It opened its first H&M stores in Bulgaria in March and expects to enter Mexico, Latvia, Malaysia and Thailand in the second half of 2012, followed by Estonia and Indonesia in 2013.
“The store in Mexico City will be the first H&M store in Latin America, and we see great demand for H&M also in this part of the world, where people are waiting for us to open,” Vinge said.
The retailer’s upscale brand COS is also expanding rapidly, opening its first stores in Italy and Finland in May, and in Poland earlier this month. It will enter Hong Kong next week, followed by Austria in August and Kuwait in the fall, Vinge said.
The global store count stood at 2,575 on May 31 versus 2,297 stores on May 31, 2011. This included 2,446 H&M stores, 51 COS stores, 55 Monki stores, 19 Weekday stores and four Cheap Monday stores.
H&M has revealed plans to unveil a new retail concept called & Other Stories in 2013 to broaden its offering. Vinge said the chain would launch in several locations, primarily in Europe, but provided no additional details. H&M is also preparing to launch e-commerce in the U.S., the world’s biggest online market, in the fall.
Shares in H&M closed up 4.8 percent to 241.50 Swedish kronor, or $38.75, on the Stockholm Stock Exchange as markets hailed the better-than-expected results.
Analysts Jamie Merriman and Anthony Sleeman for Bernstein Research noted that it was the first quarter in two years that the retailer did not record a gross margin contraction.
“We believe this result reflects strong cost control and earlier than expected input cost benefits. In our view, the key question for management is whether this reflects a change in the length of the supply chain or changes in pricing,” they wrote in a report.
“Over the medium term, we see rising competitive pressure in the value apparel segment as well as rising input cost inflation in Asia and believe the key investment controversy for H&M stems from sustainable gross margins over the long term,” they added.