LONDON — Shares in Hennes & Mauritz AB fell 2.1 percent to 346 Swedish kronor, or $40.34, in late afternoon trading Tuesday on fears of a slowdown in growth and soaring sourcing costs because of the stronger dollar.
The decline in the retailer’s shares came even though the company reported a 36 percent surge in fiscal first-quarter profit to 3.61 billion Swedish kronor, or $451.3 million. Gross margin fattened to 55.2 percent from 54.9 percent.
But the upbeat news was offset by a sharp slowing of sales growth at the start of the second quarter. Sales in the March 1 to March 21 period increased 9 percent in local currencies, trailing the 15 percent pace they logged during the quarter ended Feb. 28. All figures have been converted at average exchange rates for the periods to which they refer.
As reported, sales in the first quarter climbed 25.3 percent to 46.71 billion Swedish kronor, or $5.84 billion at average exchange rates, beating analysts’ estimates of 22.3 percent. Total sales in local currencies rose 15 percent.
The 9 percent growth figure for March fell short of analysts’ projections, and Bernstein Research called the performance “disappointing and surprising.”
Nils Vinge, head of investor relations, said during a conference call Tuesday the slowdown in March sales growth was a regular occurrence each year, and the month’s performance had to be viewed with the April and May numbers.
“Don’t draw too many conclusions from that figure. The March numbers are volatile because of the timing of when spring arrives around the world, and the Easter holiday,” he said, estimating that “negative calendar effects” knocked 2 to 3 percentage points off the March number.
Earlier in the day Karl-Johan Persson, the company’s chief executive officer, said the strong U.S. dollar would affect the company’s sourcing costs going forward, but did not spell out the impact on pricing or margins.
In their research note, Bernstein analysts Jamie Merriman and Robert Moorlen said they expect continued margin compression this year “given the headwinds from the strength of the U.S. dollar, increasing levels of investment in long-term initiatives, amortization of capitalized expenses related to IT, cost inflation in Asia and few options for cost-cutting in stores.”
During the call, Vinge flagged a “negative purchasing outlook” for the second quarter and a “more negative” one for the remainder of the year. He said despite rising sourcing costs for H&M, the company would “guarantee the best customer offering,” and would not compromise on quality.
Pressed repeatedly about how, exactly, H&M was responding to the stronger dollar he said, “It’s difficult to offset the magnitude of the sharp increase in the dollar. The impact has been significant.”
He would not be drawn on whether H&M planned to hike its prices, and said only that the company was “looking at what is happening in the different markets, and how gross margin will develop. We don’t want to go into how we will deal with this.”
He said H&M buys in a variety of currencies, sources 20 percent of its volumes in Europe, uses U.S. dollars for its sourcing in Asia, and hedges on a daily basis from the day an order is placed to when that supplier is paid. Asked whether the company would reconsider changing its sourcing plan in response to the dollar, he said, “You can’t just jump back and forth between suppliers,” adding that it was geographical expansion that dictated sourcing strategy, and that the company was looking at adding Africa and Burma to its map of suppliers due to store openings.
Vinge called the first quarter “a very good start, with well-received collections and increased market share” with challenging macroeconomic conditions in many places.
The fast-fashion behemoth noted it plans to open about 400 stores this fiscal year, entering new markets including Taiwan, which has already opened, Peru, Macau, South Africa and India.
Like its Spanish rival Inditex, H&M also continues to ramp up its profile in the United States, planning to open one of its largest stores in the world at Herald Square in New York City, spanning more than 61,000 square feet of selling space.