High-street consumers have started to loosen their purse strings, but underlying demand remains fragile, putting the onus on retailers to prop up consumption with creative strategies.
Hennes & Mauritz AB, the world’s third-largest fashion retailer, beat analysts’ expectations on Thursday by posting a 20.9 percent jump in net profit in the fourth quarter. Meanwhile, French clothing chain Etam said total group sales rose 6.5 percent, with China clocking a 31 percent increase.
The figures come after a report by the International Monetary Fund forecasting the world economy will recover faster than anticipated this year, though it will proceed at different speeds depending on the region. The IMF now expects global output to rise 3.9 percent after falling 0.8 percent in 2009.
H&M said it was already seeing an improvement. Its total sales rose 15 percent in December versus the same period last year, while same-store sales were up 3 percent — their first monthly increase in eight months. Total sales during the period of Jan. 1 to 26 were up 13 percent versus the same time last year.
The Swedish retailer is starting to shift its focus from mature markets toward higher-growth economies, noted John Guy, retail and luxury goods analyst at MF Global Securities. “Ongoing focus on expansion in key Asian markets ought to benefit them,” he said.
Net profit in the three months ended Nov. 30 totaled 6.15 billion kronor, or $884 million, with sales increasing 6 percent to 32.76 billion kronor, or $4.7 billion, from 30.85 billion kronor, or $4.4 billion, during the same quarter a year earlier. Dollar figures are converted at average exchange rates for the period.
H&M cautioned that mild fall temperatures left it holding large stocks of cold-weather items going into 2010, forcing it to offer aggressive markdowns. H&M head of investor relations Nils Vinge said the sales improvement in recent weeks was also due in part to favorable comparisons with the same period a year earlier, in particular December.
“Comparable-unit sales were down 5 percent in 2009 as a whole,” he said on a conference call, noting that despite solid growth in Germany, its biggest market, H&M faced tough trading conditions in recession-hit France, Spain and the U.S. in 2009.
That could prompt the retailer to lower its prices in certain markets and increasingly customize its offer, Vinge said. “It may involve lower prices, but could also mean more fashion and quality at the same prices,” he explained.
Guy at MF Securities noted H&M achieved significant margin uplift, especially in the fourth quarter, which it would now be able to reinvest into expanding its high-fashion offerings or adapting its offer to regional tastes. “They have benefited from internal currency hedging and surprised markets regarding their negotiations with suppliers.
For the full year ended Nov. 30, net profit came in at 16.38 billion kronor, or $2.3 billion, while sales advanced 14 percent to 118.70 billion kronor, or $17 billion, from 104.04 billion kronor, or $14.9 billion, in 2008.
Gross margin rose to 66.3 percent in the fourth quarter from 62.4 percent in the same quarter a year earlier. H&M said markdowns had a negative effect of 50 basis points on gross margin in the fourth quarter, and would likely also weigh on gross margin in the first quarter of 2010.
Vinge noted, however, customer response to the new spring collection landing in stores was “better” than in 2009 and the company remained “positive” about future expansion.
H&M indicated it would continue to focus expansion efforts in Asia, with its planned entry into South Korea and a high number of store openings in China. China and Japan jointly accounted for sales of 2.7 billion kronor, or $352 million, in 2009.
The company will open 240 stores in 2010, mainly in the U.S., U.K., China, France, Germany and Italy. This will include 12 stores for its higher-priced COS concept and 25 for trend-driven chains Monki and Weekday, including openings in Finland and The Netherlands. Investments are set to total 6 billion kronor, or $817.2 million, in 2010, Vinge said.
The chain now operates 1,988 stores in 35 markets. In addition to South Korea, it plans to enter Israel this year and introduce online sales in the U.K.
Etam, which operates 2,671 stores in China out of a total of 3,834 worldwide, said the country yielded close to 50 percent growth last year. The group posted sales of 286.9 million euros, or $423.7 million, in the fourth quarter ended Dec. 31.
Sales in Europe were down 1.5 percent year-on-year to 200.1 million euros, or $295.5 million, during the quarter, while sales in China rose 30.9 percent to 86.8 million euros, or $128.2 million.