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H&M to Launch New Retail Chain

Swedish high street retailer invests in the long-term, putting margins under pressure.

PARIS — Hennes & Mauritz AB on Thursday revealed plans to launch a new chain of stores in 2013 to broaden its offering, as the fast-fashion retailer reported that margins came under pressure in the fiscal first quarter due to heavy discounting of unsold merchandise and rising purchasing costs.

This story first appeared in the March 30, 2012 issue of WWD.  Subscribe Today.

Shares of H&M closed down 4.9 percent at 238.10 Swedish kronor, or $36.20 at current exchange, after the Stockholm-based company, known for its collaborations with designers ranging from Karl Lagerfeld to Jimmy Choo, posted lower-than-expected results for the three months ending Feb. 29.

Profit after financial items rose 4.6 percent to 3.7 billion kronor, or $544 million, while the gross margin fell to 55.8 percent from 57.8 percent during the corresponding period last year. All dollar rates are calculated at average exchange rates for the period in question.

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H&M chief executive officer Karl-Johan Persson, commenting on the figures, said the increased purchasing costs were due partly to high cotton prices at the time of sourcing for the quarter but also to the company’s long-term investments.

“We have many different projects in progress, and already next year we will be launching a completely new store chain. Like COS, which today is very successful with good profitability, the new chain of stores will be independent and complement the other offerings from the group,” Persson stated.

“We have great faith in this new brand, and we see considerable potential for further initiatives,” he added.

Head of investor relations Nils Vinge denied media reports that the new brand, due to be rolled out in Europe at the start of next year, would be “a luxury version” of its high-end COS brand.

“It will be something else, but we do, however, build on the positive experiences we have from COS,” he told analysts in a telephone conference. “We have identified a gap in the market, and we’re very excited about this.”

Asked by one analyst if he could confirm the new launch was indeed a clothing line, Vinge laughed and replied: “No, sorry. When we have more to say, we will come back to you.”

H&M head of communications Kristina Stenvinkel confirmed that Behnaz Aram, previously women’s wear designer at Swedish brand Whyred, was one of the designers on the new brand’s team, which is based in Paris and Stockholm. Aram joined the H&M New Business Unit, the division in charge of the COS, Monki, Weekday and Cheap Monday brands, in August 2011.

Vinge said the retailer also plans to broaden the range of its H&M stores by adding new concepts and product categories. To that end, it has hired extra staff and invested in IT for areas such as buying and production offices, increasing the weight of long-term investments in capital expenditure in the first quarter.

“We’re working harder than ever, both on delivering strong sales and profits here and now and also on securing many years of continued successful expansion,” Vinge said. “It would be easy for us to boost profits short term by, for example, raising prices and avoiding long-term investments. It would be easy, but, for us, unwise.”

The company expects investments to total 5.5 billion to 6 billion kronor, or $836 million to $912 million, in 2012.

Earlier this month, H&M reported that sales including VAT in the fiscal first quarter rose to 32.5 billion kronor, or $4.8 billion, up 3 percent in comparable units. It added that sales jumped 22 percent in local currencies between March 1 and March 27.

The first quarter saw the online rollout of a second collection designed by Donatella Versace, in addition to the launch of the David Beckham Bodywear collection with a 30-second commercial during the Super Bowl. This was followed by a Marni collection in early March.

“Our collections have been well received, which has resulted in increased market share in a very challenging fashion retail market, and we have strengthened our position even further,” Persson said.

H&M maintained its policy of not passing on cost increases to its customers during the quarter. Markdowns were the single biggest factor affecting the gross margin, with a negative impact of 90 basis points. “This was a consequence of the historically warm autumn that led to weaker demand for winter clothes,” Vinge said.

Adam Cochrane, retail analyst at UBS, said the company has lowered prices to make sure it retains its competitive edge against discount retailers and supermarkets, which in recent years have challenged H&M’s image as the leading purveyor of affordable fast fashion.

“In the short term, it’s maybe slightly painful for shareholders because of the earnings impact, but longer-term, it gives you a more sustainable business model,” Cochrane said.

Vinge declined to confirm whether H&M implemented price cuts during the period.

Caroline Gulliver, head of European retail at investment bank Espirito Santo, said she expected H&M’s gross margin to remain flat in 2012 versus the previous year due to the combined impact of price competition, long-term investments and rising purchasing costs.

“The structural benefit that all retailers have had over the past decade from increasing sourcing toward Asia or from Asia has now run its course, and we’re seeing labor costs go up in nearly all Asian sourcing countries,” she noted.