PARIS — Despite weaker-than-expected sales growth and sharp declines in profits during the first half of 2016, Hennes & Mauritz AB remains upbeat about the future.
“It has been a challenging half-year for fashion retail in many markets, but we have great confidence going forward and are continuing to develop our offering further within all our brands,” stated H&M chief executive officer Karl-Johan Persson.
Net profits for the Swedish fast-fashion retailer declined 21.5 percent to 7.9 billion Swedish kronor, or $945.5 million, in the six months ended May 31 compared with the prior-year period. Pre-tax profit after financial items dropped 22 percent to 10.33 billion Swedish kronor, or $1.24 billion, the retailer said. H&M’s gross margin, a key indicator of profitability, fell 2.5 percentage points to 54.9 percent.
As reported, sales including VAT increased 5 percent to 104.97 billion in the period, or $12.56 billion. In local currencies, they grew 7 percent, H&M said.
Unseasonably bad weather in March and April had a negative impact on sales in certain markets. Among H&M’s top-10 markets, first-half sales in Germany were flat, while they fell 2 percent in France and grew just 1 percent in the U.K. In Spain, sales fell 1 percent and in Switzerland they dropped 8 percent.
During a conference call with analysts, H&M head of investor relations Nils Vinge said, “Is it macro, is it micro, is it consumer sentiment?” he asked. “It’s very difficult to tell.”
Vinge said the company had performed well in Scandinavia during the period, with sales up 7 percent in Sweden, notably. “We could not have done that if the collection was weak,” he said.
First-half revenues grew 7 percent in the U.S. and 3 percent in China.
For the second quarter, H&M’s net profits fell 16.9 percent to 5.36 billion Swedish kronor, or $650.5 million, on a 2 percent sales rise to 54.34 billion Swedish kronor, or $6.59 billion.
Dollar rates are calculated at average exchange rates for the period.
“Profits in the second quarter have been affected by a continued negative U.S. dollar effect, but also by increased markdowns and the costs of our long-term investments,” said Persson. “The fact that the sales increase in the quarter was below plan naturally also had an impact on profits.”
The negative dollar effect is expected to continue to impact purchasing costs in the third quarter, although providing current exchange rates remain stable, the retailer said the dollar effect could potentially be neutral in the fourth quarter.
Providing guidance on current trading, the company said its sales including VAT in the three weeks to June 21 grew 7 percent in local currencies, and that this should be interpreted against sales growth of 14 percent in June last year.
H&M reduced its CAPEX guidance for the full year to between 12.5 and 13 billion Swedish kronor, or $1.52 billion and $1.58 billion at current exchange, although Vinge said this was due to negotiating better terms than anticipated for new store leases, rather than a reduction in planned investments. “When we enter a year, we give guidance, but it is a moving target,” he explained.
The retailer anticipates opening approximately 425 stores net this fiscal year, with the U.S. and China continuing to be its main focus for expansion. Most of the stores will be under core banner H&M, although COS is also a focus of expansion.
COS will open five new markets next year, Vinge said, when the brand is expected to hit sales of 10 billion Swedish kronor, or $1.21 billion at current exchange.
Both COS and & Other Stories, Vinge said, are continuing to see strong sales growth, including on a like-for-like basis.
Despite its lower CAPEX figure for 2016, the retailer maintained its long-term goal of growing its store count by 10-15 percent per year going forward. “If we can’t grow with the same quality and profitability, we will revise that target,” said Vinge. “We see the same potential for many years [to come].”
“There is still a big need for many people across the world to buy fashion,” said Vinge. “We see great potential in many markets.”
New markets for physical stores in the second half of 2016 will be New Zealand and Cyprus, and next year, H&M plans to enter five new countries, including Colombia.
The retailer said its e-commerce activity had continued to develop satisfactorily in the second quarter, when it launched in nine new markets in Europe as well as in Japan. Canada and South Korea will follow during the second half, meaning the firm will be present online in 34 countries before the end of the year. Further rapid development is planned for 2017.