H&M Profit Stalls as Dollar Drives Margin to 11-Year Low

H&M 3Q Net Income a Miss on Strong Dollar
  • Next six months will be ``tough,'' says Bernstein analyst
  • Retailer warns dollar will also weigh on fourth quarter

Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, reported stagnant third-quarter profit as the strength of the dollar raised garment costs and drove the gross margin to the lowest in 11 years.

Net income was little changed at 5.31 billion kronor ($630 million) in the three months through August, Stockholm-based H&M said in a statement Thursday. Analysts expected 5.37 billion kronor, according to a survey of estimates compiled by Bloomberg.

H&M warned that the dollar was stronger during the buying period for garments it will sell in the fourth quarter. The retailer gets about 80 percent of its products from Asia, where clothes prices are often linked to the greenback. The currency, which was on average 24 percent higher against the krona during the quarter, has hurt other apparel retailers like Associated British Foods Plc’s Primark.

“The company may be in for another tough six months,” wrote Jamie Merriman, an analyst at Sanford C. Bernstein, who cited the dollar’s effect on the fourth-quarter margin and difficult comparisons with year-earlier results in the first quarter.

The stock fell 0.7 percent to 308 kronor as of 9:38 a.m. in Stockholm, extending its decline this year to 5.4 percent.

Gross Margin

H&M’s gross margin narrowed to 55.9 percent, the lowest since 2004, hurt by August price markdowns along with the dollar. Inventory rose 40 percent to 25.2 billion kronor, or 14.4 percent of net sales. Most of the increase came from the stronger U.S. currency, and there was a 1.2 billion-kronor boost from a new invoice process.

“The composition of the stock-in-trade is considered to be good with a higher proportion of new garments compared to the same time last year,” H&M said.

The Swedish retailer, which sells $9.99 rib-knit sweaters and ladies’ tops starting at $4.99, is investing in e-commerce and expanding chains such as & Other Stories and COS as it tries to close the gap with larger Spanish rival Inditex SA. The company plans to start online sales in Russia soon, and said it’s still on track to increase its store count by 400 in 2015.

H&M will enter India and South Africa next month, at which time it will have stores in almost 50 markets. Next year the retailer plans to open in New
Zealand, Cyprus and Puerto Rico.

Inditex last week reported an improvement in its gross margin for the first half, which ran through July, plus an acceleration in sales. The Spanish retailer depends less on dollar-denominated Asian purchases as it has the bulk of its garments produced near southern Europe.

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