Hennes & Mauritz AB said the strong U.S. dollar should be less of a drag on its margins as the year progresses.
Battered by higher purchasing costs due to the strong dollar, as well as markdowns to clear excess stock of coats and other winter apparel, the Swedish fast-fashion giant on Wednesday reported net profit plummeted 29.6 percent in the first quarter.
Net income in the three months ended Feb. 29 came to 2.54 billion Swedish kronor, or $299 million. All dollar figures are calculated at average exchange rates for the period concerned. H&M’s gross margin, a key indicator of profitability, narrowed to 52 percent from 55.2 percent during the same period a year earlier.
The retailer posted an 8 percent increase in first-quarter sales, as reported. Sales including VAT converted into Swedish kronor totaled 50.6 billion kronor, or $5.9 billion, in the Dec. 1 to Feb. 29 period. In local currency terms, sales including VAT rose by 9 percent in the quarter, it said.
Karl-Johan Persson, chief executive officer of H&M, said first-quarter sales were “slightly below plan” but should be viewed in light of a very strong start to 2015.
“Profits in this year’s first quarter have been negatively affected by a continued very negative U.S.-dollar effect which made our purchasing much more expensive, as well as by increased markdowns due to larger volumes of winter garments that remained as a result of the warm autumn,” he said.
“The negative dollar effect continues for purchases made for the second quarter 2016, although the negative effect has begun to gradually decrease due to the start of the annualization of last year’s strong U.S.-dollar exchange rate,” Persson added.
“Should today’s exchange rates continue, the effect of the U.S. dollar on purchasing coasts for the fourth quarter will be neutral or slightly positive compared to the corresponding quarter the previous year,” he said.
Group sales including VAT rose 2 percent in March in local currencies. H&M said sales for March, April and May should be grouped, since the early timing of Easter and weather effects during this period made it difficult to view the figures individually.
However, Nils Vinge, head of investor relations at H&M, admitted the March figure was below expectations. “March is a disappointment,” he said in a conference call. He singled out weakness in Germany, the retailer’s largest single market, and said conditions in Asia remain difficult.
“The market in general is tough and of course we’re not happy with our performance, especially in Hong Kong and China, but we still continue of course to expand and we see great potential going forward. But the sales performance of the last year or so is, of course, disappointing,” he explained.
Persson said the group’s strong expansion would continue as it prepares to enter New Zealand, Cyprus and Puerto Rico this year. H&M plans to add 425 stores in the 2015-2016 financial year and is set to cross the threshold of 4,000 stores with its planned opening in the Mall of India in New Delhi in April.
The retailer reported “very satisfactory” sales and profit development for its online activities. This year, it plans to launch e-commerce in Japan, Greece, Canada and South Korea, meaning a total of 11 online markets will be added in 2016.
Vinge declined to say what percentage of turnover e-commerce represented, but emphasized the activity was profitable.
“We’ve been doing direct sales since the Eighties, when we acquired a mail-order company called Rowells, and we were early with online in ’98 and we have gradually developed it, so it’s become a very successful and integrated part of the business,” he said.
“Soon, we will have it in 34 markets and we continue to expand it into all our markets,” Vinge added.
H&M also plans to grow its other brands – COS, & Other Stories, Monki, Weekday and Cheap Monday – and is working on launching at least one other fashion brand, Vinge added. “We definitely see good things coming out of our investments,” he said.
The retailer has been expanding into other categories and reported a good start for H&M Beauty, launched in July 2015. The line was available in almost 1,000 stores at the end of the first quarter and is set to enter into a further 275 H&M stores in 2016.