H&M profits down on discounting, higher costs

[January 26, 2012]  STOCKHOLM (AP) -- Swedish fashion retailer Hennes & Mauritz AB on Thursday posted a 2.4 percent drop in fourth-quarter net profits, slightly weaker than market expectations, due to higher materials costs and heavy discounting to attract customers during an economic downturn.

Still, the company said it continued to gain market share during the period and remains optimistic about the future.

It plans to open 275 new stores in the coming year -- in Bulgaria, Latvia, Malaysia, Thailand and Mexico, the group's first foray into Latin America. It will also launch online sales on the world's largest online market, the United States.

H&M, which is headquartered in Stockholm, said net profit dropped to 5.36 billion kronor ($790 million) in the September-November period from 5.49 billion in the same quarter a year earlier, despite a rise in sales to 36.19 billion kronor from 34.79 billion kronor.

The company blamed currency fluctuations, higher purchasing prices -- mainly due to more expensive cotton -- and discounts it had to make to fend off competition during what it called "one of the toughest years for a long time for the fashion retail industry."

It said it also focused on higher quality and more sustainable materials.

H&M, whose main competitor is Spain's Inditex, the owner of Zara, specializes in offering the latest fashion trends at low prices. It has collaborated with international designers and fashion icons, such as Karl Lagerfeld, Stella McCartney, Madonna and David Beckham.

The closely-watched gross margin, an indicator of profitability, fell to 61.9 percent in the fourth quarter from 63.2 percent a year earlier.

However, the December sales figures, released in conjunction with the report, pleased market watchers. They showed a 13 percent increase, including sales tax, compared with the same month a year earlier, while the company said the development for January looked "strong."

Analysts had feared that the warmer-than-usual weather would have negative effects on the sale of its autumn- and winter collections during the Christmas season.

For the full year 2011, the group posted a net profit of 15.82 billion kronor, down from 18.68 billion kronor the previous year.

In mid-morning trade, shares in the company had fallen 0.6 percent to 220.90 kronor ($32.65) on the Stockholm stock exchange.

Simon Kjellstrom, an analyst at Pareto Ohman in Stockholm said that although the squeezed margins disappointed slightly, the positive news about strong sales in both December and January largely offset that gloom. "The first quarter has started off well," he said, "and it balances it out."

CEO Karl-Johan Persson said that despite the economic uncertainty experienced in many of the company's markets in 2011, "the fact that we have gained market share, proves that our customers appreciate our collections."

Looking ahead, he said the macro-economic challenges are likely to continue also in 2012, "but we have a strong belief in our offering and are convinced that H&M will continue to maintain its strong position as the year goes on."

H&M, founded in 1947, has 94,000 staff and around 2,500 stores in 43 countries. It also owns other brands like higher-priced COS and urban fashion labels such as Monki, Weekday and Cheap Monday.

[Associated Press; By LOUISE NORDSTROM]

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.