H&M Profit Misses Estimates as Margin Reaches Eight-Year

H&M Profit Misses Estimates as Margin Reaches Eight-Year Low
Customers use escalators to move to retail floors inside an Hennes & Mauritz AB store in Malmo. Photographer: Linus Hook/Bloomberg

Hennes & Mauritz AB, Europe’s second-largest clothing retailer, reported first-quarter profit that missed estimates as increased textile costs and markdowns led to the weakest profitability in eight years.

Net income rose 4.6 percent to 2.74 billion kronor ($411.9 million) in the three months through February from 2.62 billion kronor in the year-earlier period, the Stockholm-based company said in a statement today. The average estimate of 12 analysts surveyed by Bloomberg was for profit of 2.99 billion kronor.

H&M fell as much as 5.9 percent in Stockholm trading, the most since August. The retailer, which sells jeans for less than 20 euros ($26.70) and underwear designed by soccer player David Beckham, said the gross margin narrowed to 55.8 percent of sales from 57.8 percent a year earlier. That was the lowest since the first quarter of 2004, according to data compiled by Bloomberg.

“H&M is having to give up margin to drive sales,” Richard Chamberlain, an analyst at Bank of America, wrote in a report. “Going forward, we expect H&M to be less aggressive on price.”

H&M’s profitability waned as the company sought to keep prices down, while paying more for raw materials such as cotton. The retailer said it avoided raising prices to gain customers as Europe’s sovereign-debt crisis eroded consumer confidence.

Purchasing expenses increased because of higher cotton costs and “long-term investments aimed at broadening our total offering,” Chief Executive Officer Karl-Johan Persson said.

More Markdowns

The number of markdowns in the quarter was higher than a year earlier because of an increase in inventory as mild fall weather hurt demand for winter garments, the retailer said.

Sales in the quarter rose 14 percent to 27.8 billion kronor, excluding value-added tax. Revenue at stores open at least a year increased 3 percent, the company said.

Sales growth accelerated this month, according to the statement, with revenue gaining 22 percent at local currency rates, compared with 13 percent in the first quarter.

H&M said it plans to add about 275 stores in the financial year through November 2012, with China, the U.S. and the U.K. being the largest areas of expansion. The retailer also sees opportunities in Germany, France and Italy and will start online sales in the U.S. in the fall, it said. The retailer will also start up in Bulgaria, Latvia, Malaysia, Mexico and Thailand.

H&M will introduce a new chain next year, Persson said, without elaborating. The chain won’t be a luxury version of the upmarket Cos brand, he told journalists at a press conference in Stockholm. on new name for chain: H&M won’t yet disclose the name it has chosen for the chain, Persson said.

Inditex Declines

H&M shares were down 4.7 percent at 238.7 kronor as of 10:49 a.m. That pared this year’s gain to 7.9 percent, compared with larger competitor Inditex SA’s 12 percent advance.

Inditex, the world’s largest clothing retailer, declined as much as 3 percent in Madrid trading and was down 1.6 percent at 70.93 euros as of 10:49 a.m. The owner of the Zara chain reported a 12 percent increase in full-year profit last week as sales were boosted by openings in Asia, while also unveiling plans to maintain store expansion over the next three years.

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