store of Swedish clothing company "H&M" (Hennes & Mauritz) in the city center of Bremen, northern Germany, 15 January 2018. H&M has apologized after a widespread outcry over a promotional image that many have called racist.HM apologized after a widespread outcry over a promotional image, Bremen, Germany - 15 Jan 2018

PARIS — Has Hennes & Mauritz marked a turning point? Showing signs of progress with its overhaul, H&M on Friday reported expectation-beating results for the first quarter with fewer markdowns.

“Our ongoing transformation work has contributed to stronger collections with increased full-price sales, lower markdowns and increased market shares,” said Karl-Johan Persson, chief executive officer.

The Swedish fast-fashion group, which includes Cos, Monki and Weekday, in addition to its namesake label as well as & Other Stories, reported a 41 percent drop in first-quarter profit as the company continued to invest in improving its logistics system and online services. Adding to the steep percentage decline, the same period last year was boosted by a one-off tax measure in the U.S.

Profit for the Dec. 1 to Feb. 28 period was 803 million Swedish kronor, or $86.55 million as the company replaced its online platform in Germany; the transition weighed on sales in the country over the period. Gross profit was up 11 percent to 25.53 million Swedish kronor with a gross margin of 50 percent as markdowns in relation to sales dropped 1.5 percentage points compared to the same period last year.

The performance beat expectations and shares shot up nearly 15 percent in trading to 162.70 Swedish kronor.

“Gross margin a big positive surprise,” for the quarter, said Richard Chamberlain, analyst with RBC Capital markets. The analyst recently upgraded the company to sector perform on expectations that market share will stabilize as the company’s investments in improving its distribution channels and products lead to improved sales and margins.

In a phone call with analysts, Persson said business was on a “good track” in February and March, thanks to better collections, but that it’s still a “shaky market.” The weather helped, especially in Europe, but a later Easter this year makes for a negative calendar effect.

“We’re still in a transition period, but we believe in gradual improvement,” he said. While stocks are not at the right level in relation to sales, the company is progressing on that front thanks to investments in logistics and integrating the various selling channels, Persson added. At the same time, the company is using artificial intelligence to add precision to predict trends and decide where to send clothing, the executive also said.

The group singled out Sweden, the U.K., Poland, China and India as performing the best in terms of growth and market share, with the fastest growth coming from India, up 42 percent in local currencies. It announced that the H&M label will be sold on Myntra and Jabong in India, the country’s largest online marketplaces, later this year. It is also launching online sites in Mexico and Egypt this year.

While the group posted growth in the U.S., H&M is “not really where we want to be,” executives said.

“We see that we can improve more there, but it’s a step in the right direction from the disappointing development in the U.S.,” Persson said. H&M has been testing direct purchasing through Instagram in the U.S. and is building a new, high-tech logistics center on the West Coast due to open in 2020.

The Swedish fast-fashion retailer had previously reported a 4 percent rise in first-quarter sales in local currencies to 51.01 billion Swedish kronor, or $5.49 billion, with a positive currency rate effect. Currency effects are expected to gradually turn negative, the group said, due to a strengthening U.S. dollar.

The end-of-year period was a challenge for many apparel companies that got sucked into cutting prices at the end of the year, eating into margins. Spain-based Inditex, owner of Zara, has been pushing ahead of rivals in the digital sphere, with high-tech sales and logistics systems and has managed to avoid the price-slashing that swept much of the industry, focusing on margins and keeping tight control over inventories as it integrates stores with its online business.

H&M has, in recent months, redirected resources from expanding its store network to revisiting store formats, while investing heavily in technology to speed up deliveries and revamp its logistics systems for online commerce. The group plans to add 175 new stores this year, mostly in new faster growing markets while it cuts 50 stores from its European network.

Online growth rates of more traditional retailers like Inditex and H&M have exceeded pure play online peers, RBC noted in a recent research report on European apparel retail.

H&M is also revisiting its loyalty program, which counts 35 million members. It plans to expand the program from 16 markets to add the U.S., Canada and Russia and four other markets in May, and by the fall, into WeChat in China. Free delivery and returns to club members have pushed down margins, but “customers appreciate it,” noted Persson.

“Maybe we will make some adjustments to increase profitability,” for e-commerce, he added, but said that the online channel overall has “good profitability.”

Click-and-collect services, meanwhile, will be introduced to 10 more new markets.

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