The weather outside is frightful for Hennes & Mauritz AB, with a mild winter and currency headwinds denting fourth-quarter profits, which dipped 8 percent.
Markdowns to clear an excess stock of coats and other winter apparel, plus higher purchasing costs due to the strong U.S. dollar, are expected to have “the same negative impact” in the first quarter, the Swedish retailer warned on Thursday, sending its shares down 4.8 percent to close at 282 Swedish kronor, or $33.16 at current exchange.
The double-whammy is expected to shave 100 to 200 basis points from first-quarter margins, Jyrki Tervonen, chief financial officer, said on a conference call. He noted, however, that the negative impact is expected to gradually diminish from the second quarter.
H&M’s gross margin narrowed to 57.5 percent versus 60.4 percent in the year-ago quarter as sales in local currencies advanced 9 percent.
Net income in the three months ended Nov. 30 came to 5.53 billion Swedish kronor, or $649 million at average exchange.
The Swedish retailer had also accelerated its store expansion, adding 249 locations in the three months ended Nov. 30 out of 413 for the year.
Sales gains for the full fiscal year varied across its top 10 markets, rising 2 percent in local currencies in Germany; 18 percent in the U.S.; 8 percent in the U.K.; 7 percent in France; 16 percent in China; 6 percent in Sweden; 17 percent in Italy, and 11 percent in Spain. Sales fell 1 percent in the Netherlands and 2 percent in Switzerland.
H&M said it plans to keep up the pace of store openings this year and add 425 units, with the U.S. and China the focus of development. New countries for the fast-fashion giant are New Zealand, Cyprus and Puerto Rico. It also plans to add e-commerce in nine markets: Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania and Luxembourg.
“We are very happy with our online development,” said Nils Vinge, head of investor relations, while hastening to add that, “we definitely see potential to grow the number of physical stores for many years.”
He noted that H&M units are stretching ever larger to accommodate additional product categories, with suits in 120 doors, sport in 2,600 and beauty — launched in mid-2015 — in 900 stores, with 300 more getting the range this year.
The retailer ended the year with 3,924 stores in 61 markets, citing a “very strong year” for its COS banner, while acknowledging some challenges growing its Monki, Weekday and Cheap Monday chains. “There are things we need to improve before we accelerate them,” Vinge said.
January sales are expected to rise 7 percent, he said, reflecting a positive calendar impact of 2 percent due to an extra Sunday.
H&M recently reported December tallies were up 10 percent in local currencies versus 4 percent in November, 12 percent in October, and 11 percent in September, reflecting volatile market conditions and the retailer’s dependency on weather to shift garments.
Chief executive officer Karl-Johan Persson issued an optimistic outlook, saying, “We firmly believe that our customer offering and our investments will lead to increased market share and strengthen H&M’s position even further in 2016.”
In a research note, Barclays said it expects margin erosion to put pressure on shares in the near term.
Beyond the first quarter, “it is encouraging that the store growth target has been maintained, despite some more bearish expectations for a reduction. At the same time, the new online launches announced, the increased store growth at the end of the year and weather normalization could help sales growth going forward,” the bank noted.