Hennes & Mauritz Profit Drops for a Fifth Quarter in ‘Challenging Market’

Hennes & Mauritz AB, Europe’s second-largest clothing retailer, reported a fifth consecutive drop in quarterly profit as the cost of making garments increased and the company stepped up discounting.

Net income slipped 2.4 percent to 5.36 billion kronor ($797 million) in the three months ended Nov. 30, Stockholm-based H&M said in a statement today. The average estimate was 5.37 billion kronor, according to a Bloomberg survey of 14 analysts.

H&M, which sells dresses for less than $12.95, said the macroeconomic climate will remain “tough” in many markets during 2012. Higher labor costs in Asia weighed on profit at the company, which described the situation in markets it sources from as “challenging.”

“These figures are unlikely to reassure investors that H&M’s repositioning is currently resulting in a more stable operating performance,” Assad Malic, a Credit Suisse analyst in London, said in a note. He has a “neutral” rating on H&M.

The shares rose 0.3 percent to 224.9 kronor at 3:56 p.m. after falling as much as 2.1 percent. They’ve risen 1.7 percent this year, compared with a 7.5 percent gain for larger competitor Inditex SA (ITX), owner of the Zara chain.

H&M’s gross margin narrowed to 61.9 percent of sales in the quarter from 63.2 percent a year earlier. Profitability was affected by record cotton prices in the first half of last year and increased discounting, according to Anne Critchlow, an analyst at Societe Generale in London.

More Markdowns

“H&M has strengthened its price position over the past 18 months, which has reduced the gross margin,” Critchlow said.

The number of markdowns in the first quarter of this year will be higher than a year earlier because of an increase in inventory, the retailer said. Inventory rose 20 percent as of Nov. 30 and was slightly higher than planned, it said.

H&M doesn’t envisage big changes to sourcing in Asia, Chief Executive Officer Karl-Johan Persson said at a press conference in Stockholm. The company obtains about 75 percent of products from the region, compared with 35 percent for Inditex.

Fourth-quarter net income only met estimates because of a lower-than-anticipated tax rate of 21 percent, according to Caroline Gulliver, an analyst at Espirito Santo Investment Bank. Pretax profit fell 5.2 percent to 6.8 billion kronor, missing the 7.22 billion-kronor average estimate of 16 analysts.

Versace Collection

Revenue at stores open at least a year has risen about 3 percent so far in January, Societe Generale’s Critchlow said, based on total revenue figures reported by the company today. December comparable sales climbed 4 percent.

H&M always plans for positive like-for-like sales, Finance Director Nils Vinge said on a conference call.

The Swedish retailer, which is selling a collection by Italian fashion house Gianni Versace SpA, last month reported a 3 percent decline in fourth-quarter same-store sales as shoppers delayed buying winter garments amid mild weather.

H&M plans to open 275 stores this year and sees expansion prospects in France, Italy and Germany, its biggest market. The retailer will open in Mexico and start U.S. online sales in the fall. It opened 266 stores last year, bringing the total to about 2,500. The expansion was led by China, where the company opened 35 stores, and it will add more than that this year, Vinge said on the call.

The retailer left its full-year dividend unchanged at 9.50 kronor a share.

To contact the reporter on this story: Armorel Kenna in Milan at akenna@bloomberg.net

To contact the editor responsible for this story: Sara Marley at smarley1@bloomberg.net

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