H&M Costs to Rise on Dollar as Margins Reach Nine-Year Low

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Hennes & Mauritz AB warned that the rising dollar will have a “very negative” effect on garment costs in the second half after the greenback drove second-quarter profitability to the lowest level in nine years.

Gross margin narrowed to 59.4 percent in the three months through May, Stockholm-based H&M said Thursday, missing the 59.8 percent estimate of analysts polled by Bloomberg. The shares fell as much as 2.7 percent in Stockholm.

The vendor of $9.95 beach dresses and $12.95 espadrille sandals said purchasing costs will be “substantially increased” because of the dollar in the second half. H&M gets about 80 percent of its products from Asia, where clothes are often priced in dollars. The currency shift has hurt other apparel retailers like Associated British Foods Plc’s Primark.

“With high U.S. dollar sourcing exposure, and relatively short hedging, H&M have felt the headwind of U.S. dollar appreciation earlier than most,” said Simon Bowler, an analyst at Exane BNP Paribas. “This is likely to persist.”

The dollar was 26 percent higher than the euro on average during the second quarter, compared with the year-earlier period, and 31 percent higher against the krona.

H&M’s gross margin may narrow by 2 percentage points in the second half from a year earlier, Barclays analysts estimate.

Selling Beauty

The retailer won’t take the lead in raising prices to pay for the dollar’s strength, head of investor relations Nils Vinge said at a presentation. In Japan, the weakness of the yen is causing Fast Retailing Co.’s Uniqlo to raise prices by an average of 10 percent for fall and winter wear this year.

“We are obviously flexible, but we will never be the first to increase prices,” Vinge said. “We’ll follow closely how competitors choose to act. Some competitors have already started raising prices, and it’s probable that more competitors will, because the U.S. dollar makes a big difference. We will take a long-term view and stick to our business model.”

H&M shares were down 2.4 percent at 331.9 kronor as of 10:01 a.m. in Stockholm, leading declines in Sweden’s OMX Index.

The retailer also said Thursday it will introduce a line of makeup, body-care and hair products called H&M Beauty in 900 stores in 40 markets, starting next month. H&M also said it plans to increase its store total by about 400 shops this year, and expand into new markets like India and South Africa.

Sales in the first three weeks of June rose 14 percent in local currencies, accelerating from 10 percent revenue growth in the second quarter, H&M said. Net income in the second quarter rose 11 percent to 6.45 billion kronor ($783 million), in line with estimates.

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