PARIS — Despite reporting a 20 percent jump in after-tax profits in the three months to Aug. 31, analysts and investors homed in on Hennes & Mauritz AB’s decline in gross margin, which dropped to 58.3 percent in the period from 58.8 percent in the third quarter of 2013.
External factors, mainly cost inflation, negatively impacted the firm’s margins, although positive foreign-exchange effects partially mitigated this.
“We expect long-term gross-margin pressure, as we suspect increased competition from value players like Primark and Forever 21 will make it increasingly difficult for H&M to pass through cost inflation from the supply chain to customers,” Alliance Bernstein analysts Jamie Merriman and Rupert Galway-Cooper wrote in a research note.
H&M shares dropped 4.2 percent in trading on Stockhom’s OMX Nordic market on Thursday to close at 300.50 Swedish kronor, or $41.66 at current exchange.
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During a conference call, Nils Vinge, H&M’s head of investor relations, told analysts the company is absorbing cost inflation, rather than passing it on to consumers, mentioning its increased use of sustainable materials, as in its Conscious Denim collection, to be launched next week.
“By 2020, all our cotton should be from sustainable sources,” Vinge said. “Of course, it’s an investment, but we are investing in our common future.”
Since the company initiated its in-store garment recycling program last year, it has collected 8,000 metric tons of used clothing from consumers, he said.
The company also is continuing to focus on improving its collections and enhancing consumers’ in-store experience, he said. Its new sportswear and expanded shoe collections are cases in point. “It extends our offering and attracts more customers,” Vinge said, confirming that initial response to both collections had been positive.
He also confirmed that the company’s long-term investments for 2014 would be on the high side of previous guidance, at just above 800 million Swedish kronor, or $110.9 million.
H&M will continue to invest in new stores next year and said it would open in South Africa, Peru, Taiwan and Macau as well as India, where its launch was initially planned for 2014. A total of around 180 new stores are planned for the fourth quarter, with the net number of new units for the year standing at 375. “China and the U.S. remain the largest expansion markets,” Vinge said.
H&M also will open eight to 10 new online markets next year, following the strong reception of its e-commerce offer in France, Spain, Italy and China this year, although it did not specify which new countries it would tap, and analysts noted that they would likely be smaller markets for the retailer and have less of an impact on sales.
The fast-fashion retailer reported a 20 percent jump in after-tax profits in the three months to Aug. 31, to 5.3 billion Swedish kronor, or $779.6 million, on the back of a 16 percent increase in local currency sales. Gross profit amounted to 22.63 billion Swedish kronor, or $3.33 billion, a 20 percent increase.
“We have continued to gain market share, thanks to strong sales development for all our brands,” said H&M chief executive officer Karl-Johan Persson.
Net sales for the quarter in Swedish kronor totaled 38.81 billion, or $5.71 billion, a 21 percent increase on year.
H&M no longer publishes like-for-like sales data, but, according to Bernstein, its same-store sales probably rose in the region of 6 percent.
For the nine months to the end of August, H&M said net profit reached 13.75 billion Swedish kronor, or $2.08 billion, a 19 percent increase, on the back of an 18 percent rise in net sales to 108.78 billion Swedish kronor, or $16.46 billion. Sales in local currencies grew 15 percent.
H&M also reported a 7 percent local currency increase in sales from Sept. 1 to Sept. 23, impacted by unusually warm weather in most of its markets.
Dollar figures are calculated at average exchange for the period in question.