PARIS — Hennes & Mauritz AB is expanding its global footprint, and the strategy is coming at a cost.

This story first appeared in the March 28, 2014 issue of WWD. Subscribe Today.

Substantial long-term investments in areas such as IT and online retailing bit into the group’s first-quarter results.

The Swedish fast-fashion retailer said profit after financial items in the three months ending Feb. 28 rose 8 percent to 3.49 billion Swedish kronor, or $536.1 million, which was below analyst expectations.

Operating profit increased by 9 percent to 3.4 billion Swedish kronor, or $522.2 million. Dollar rates are calculated at average exchange for the period in question.

“If we disregard cost increases for the long-term investments, operating profit would have increased by 14 percent compared to the corresponding quarter last year,” said chief executive officer Karl-Johan Persson.

But this figure would have still missed some analysts’ forecasts. The group’s shares fell 4.3 percent in trading on Thursday to close at 277.40 Swedish kronor, or $43.11 at current exchange, on the Stockholm Stock Exchange.

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During a conference call on Thursday, the group’s investor relations manager Nils Vinge said that H&M would continue to spend “in order to strengthen the group’s position and secure future expansion.”

According to his estimates, full-year investment costs are likely to weigh on this year’s results by an additional 600 million to 800 million Swedish kronor, or $93.3 million to $124.3 million, albeit “unequally divided between the quarters.”

“And the costs will remain high in 2015 as well,” he said.

The Swedish purveyor of cheap chic, which last week reported a gain of 12 percent in first-quarter sales, said it would intensify its global rollout of online stores, with Spain, Italy and China slated to go live this year.

In brick and mortar, a total of 375 new doors will be added this year, including, for the first time, Australia, the Philippines and India.

The group’s new format & Other Stories, which opened eight doors in 2013, will see “at least eight more this year, in the U.S., in Belgium and the Netherlands,” said Vinge, while the U.S., Austria and Ireland will set up online shops for the brand. Separately, & Other Stories said its New York store would be located at 575 Broadway.

Expansion also continues for other brands. COS will launch in the U.S. online, accompanied by physical store openings in New York and Los Angeles. In addition, the brand will move into Australia and South Korea this year.

Meanwhile, 15 new markets are planned for H&M Home as well.

“The reason why we invest so much is that the multichannel strategy is interesting,” said Vinge. “We invest in the group, and the investments have started generating revenue — not in full scale, but they all will generate revenue in the future,” he said. However, he dismissed questions about the exact timing of that expected “payoff.”

“Overall, these are a disappointing set of results, with H&M significantly missing consensus,” said analysts at Bernstein Research in a report issued Thursday. “While part of this miss can be attributed to long-term investments, we believe it is also indicative of weak [like-for-like] sales performance and price investment, as the company tries to compete in the fast-growing and increasingly populous value apparel world.”

Vinge said, “Fashion apparel remains one of the most competitive industries; some of those who come on board develop well, others have problems. We can never relax. Constant improvement is one of the most important values of H&M.”

The group, whose store count stood at 3,192 on Feb. 28 versus 2,818 stores on the same date last year, said it therefore targets to increase the number of stores by 10 to 15 percent per year — “for many years to come,” said Vinge. This would slow down in the future, when online will have changed the picture, but not anytime soon.

The gross margin in the first quarter came in at 54.9 percent versus 55.2 percent the previous year, the company said.

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