Hennes & Mauritz AB (HMB), Europe’s second-biggest clothing retailer, reported profit that topped estimates for the first quarter in three as the company pared costs while adding new brands and a U.S. online store.
The shares rose as much as 8 percent, the most since January 2010, after H&M said net income rose to 4.43 billion kronor ($690 million) in the three months ended Aug. 31, beating the 4.15 billion-kronor average estimate of 16 analysts.
The Swedish company, which sells imitation leather pants for $9.95 and has signed up supermodel Gisele Bundchen as the face and voice of its fall campaign, is investing in online retailing and new concepts as it chases bigger rival Inditex SA. H&M didn’t explain its improved profitability, though analysts said the gains were partly because of lower expenses.
“They’ve had very good cost control and all those initiatives and investments are starting to pay off,” said Soeren Loentoft Hansen, an analyst at Sydbank A/S in Aabenraa, Denmark. “That’s reflected in these better earnings today.”
The company said its gross margin expanded to 58.8 percent of sales from 58.2 percent a year earlier. Discounts in relation to sales had a negative effect on the gross margin of 0.2 percentage points compared with a year earlier, it said.
The margin expansion was “likely driven by the anniversary of cost investments,” Exane BNP Paribas analyst Simon Bowler said in a note, referring to past steps taken by the retailer to reduce prices and improve product quality.
Costs in comparable stores were down, both as a share of sales and in absolute figures, H&M said.
Before today, the retailer had missed earnings estimates in nine of the 12 most-recent quarters, including the last two, according to data compiled by Bloomberg.
H&M is following the example of Inditex by expanding online, while also boosting growth of existing brands. The retailer will add new online markets in 2014, while growing brands such as the COS and & Other Stories lines, Chief Executive Officer Karl-Johan Persson said.
H&M reported last week that third-quarter sales increased by 11 percent to 32 billion kronor, excluding value-added tax.
Also last week, Zara owner Inditex posted an unexpected rise in first-half profit and said sales growth accelerated since the end of July helped by faster expansion.
H&M in August started an online store in the U.S. after previous delays and has said it will add several new e-commerce markets during the next two years. The retailer is also expanding its sports offering and earlier this year opened & Other Stories, a chain featuring more accessories.
The cheap-chic retailer had 2,964 stores at the end of August and stood by its plans to add a net 350 this year. Next year, H&M will open a first store in Australia and in 2015 the retailer will expand to South Africa.
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