PARIS — Hennes & Mauritz AB said net profit fell 18 percent in the second quarter as a drop in consumer spending forced many fashion retailers to slash their prices — at a time when rising input costs are already pressuring margins.

This story first appeared in the June 23, 2011 issue of WWD. Subscribe Today.

During the three months ended May 31, net income fell to 5.75 billion Swedish kronor, or $917 million, from 7.04 billion kronor, or $960 million, during the same period in fiscal 2010. Dollar amounts are calculated at average exchange rates for the periods in question.

The Swedish high-street retailer had published preliminary data last week showing sales excluding value-added tax in the second quarter rose 2 percent to 27.6 billion Swedish kronor, or $4.4 billion, reflecting the sharp appreciation of the Swedish currency during this period.

Sales varied sharply from month to month, with April boosted by the Easter weekend and warm weather, which brought forward purchases and thereby dampened the retailer’s performance in May.

“We continue to gain market share in a very challenging market, which proves H&M’s strong position,” stated chief executive officer Karl-Johan Persson.

H&M recently opened its first stores in Romania and Croatia, and plans a net addition of around 250 stores for the 2010-2011 financial year as a whole, with China, the U.K. and the United States slated to be the largest expansion markets. The retailer plans to open its first unit in Singapore this fall.

Persson said consumer spending had been impacted by rising interest rates, higher energy prices and austerity measures in many economies. “During the spring, the fashion retail industry has been characterized by many price campaigns and special offers,” he noted.

However, H&M said markdowns in relation to sales were stable in the second quarter versus the same period a year earlier.

Gross margin fell to 61.7 percent in the second quarter from 65.9 percent at the same time last year, hit by rising cotton prices, reduced spare capacity at suppliers, higher transportation costs and a negative U.S. dollar effect. A change in the firm’s currency hedging policy also had an impact of 50 basis points on the margin, it added.

H&M has stuck to its policy of not passing on cost increases to customers in favor of boosting its market share in the longer term.

During a conference call, Nils Vinge, head of investor relations, noted that many of H&M’s peers have started to raise prices in the face of higher cotton and transportation costs and capacity constraints in the supply chain. However, he remained tight-lipped on future pricing.

“Our profitability remained strong with an operating margin of 20.3 percent despite strong negative effects from many external factors that were beyond our influence,” said Persson. The operating margin was down from 25.8 percent in the corresponding period a year earlier.

Selling and administrative costs rose 14 percent in local currency terms in the quarter to 11.4 billion kronor, or $1.8 billion, due to ongoing expansion, long-term investments in marketing, IT and online and catalogue sales. A provision of 248 million kronor, or $39.5 million, for the company’s recently launched incentive program for employees had a negative impact on profits, said Persson.

Including franchised operations, the company has about 2,300 stores in 40 markets.

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