H&M Profit Misses Analyst Estimates as Gap to Inditex Widens

Hennes & Mauritz AB (HMB), Europe’s second-largest clothing retailer, reported third-quarter profit that missed estimates and delayed the start of online operations in the U.S. as it falls further behind Zara owner Inditex (ITX) SA.

Net income rose 0.9 percent to 3.62 billion kronor ($550 million) in the three months ended Aug. 31, Stockholm-based H&M said today, compared with the 4.05 billion-kronor average estimate of 14 analysts compiled by Bloomberg.

H&M fell the most in almost five months in Stockholm trading. The retailer has struggled to keep pace with the growth of larger competitor Inditex, which last week reported profit that beat estimates. H&M said today that profit margins shrank in the quarter, hurt by increased costs in Asia, a week after saying a heat wave in Europe caused sales to miss estimates.

“Inditex is fast-fashion so it has a compelling product, which sells whatever the weather, whatever the macro-economic conditions,” Anne Critchlow, a London-based analyst at Societe Generale, said by phone. “Inditex is rolling out online very rapidly, boosting like-for-like sales growth and has very high exposure to fast-developing emerging markets.”

H&M fell 5.8 percent to 232.20 kronor at the close of trading in Stockholm, the steepest drop since May 4. The stock has risen 4.9 percent this year, trailing Inditex’s 52 percent gain. Inditex dropped 2.8 percent in Madrid today.

Margin Shrinks

While H&M’s sales in the quarter increased 10 percent at local currency rates, the gross margin narrowed to 58.2 percent from 58.6 percent a year earlier, the company said. Inditex said last week that its gross margin widened to 59.6 percent in the first half from 58.4 percent a year earlier.

Lower cotton prices, which analysts had expected to boost profitability, had a “neutral to positive effect,” H&M said. Currency shifts, mainly the strength of the krona against the euro, reduced profit by about 200 million kronor.

“I’m surprised that cotton was not more of a benefit to gross margin in the third quarter because the commodity price more than halved last year -- the benefit should now be flowing through to H&M,” Critchlow said.

The Swedish retailer sources 75 percent of products from Asia, where labor costs are rising, Critchlow said. Inditex gets 50 percent of its merchandise from “proximity countries,” mainly Spain and Portugal, and 15 percent from Turkey, she said. H&M said today it expects the impact of sourcing and currency shifts to be “neutral” in the fourth quarter.

U.S. Online Delay

H&M’s plan to introduce online sales in the U.S. will be delayed until summer next year after adapting to the market there took longer than expected, Chief Executive Officer Karl- Johan Persson told journalists in Stockholm today.

“The main issue at present is marrying the costs of distribution to the likely profitability of the products, given H&M’s relatively low price points,” Jamie Merriman, a retail analyst at Sanford C. Bernstein, said of the delay.

In contrast, H&M said it will step up store expansion, adding about 300 outlets in the financial year through November compared with a previous estimate of 275.

The retailer, which sells jeans for less than 30 euros ($39), has focused expansion on Asia and the U.S. to help offset a slowdown in European consumer spending as the region’s economy edges toward its second recession in three years. Inditex said on Sept. 19 that sales have accelerated since July, helped by expansion in emerging markets.

“Conditions in the fashion retail industry continued to be challenging in many markets -- both as regards the weather and the macroeconomic climate,” H&M’s Persson said in a statement.

Sales in the period Sept. 1 to 25 were up 14 percent, adjusting for calendar effects and currency shifts, the company said today. The retailer didn’t have more price cuts or sales in the third quarter than previously, Persson said.

To contact the reporter on this story: Julie Cruz in Frankfurt at jcruz6@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net

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