H&M Stays Upbeat in Tough Times

Many retailers, facing the worst recession in decades, are scaling back their global ambitions. Not Swedish affordable-fashion chain Hennes & Mauritz (HMB.ST). Instead, new CEO Karl-Johan Persson—the 34-year-old grandson of H&M's founder, who took over the top job on July 1—intends to ramp up international expansion in the second half of this year, opening up 159 new stores by the end of November in addition to the 84 outlets launched in the first half of 2009.

Persson takes the reins a week after the company reported better-than-expected second-quarter results. H&M said net profits in the quarter ended May 31 hit $532 million, up 6% from the same quarter last year, on sales (excluding value-added tax) that were up 23%, to $3.5 billion. Overall, first-half sales rose 6% in local currencies to $6.6 billion, though sales for stores open more than a year fell by 3% over the six-month period. In a June 25 statement, H&M said it "remains positive towards the future expansion and the company's business opportunities." Persson is currently declining interview requests.

Discount retailers such as H&M are proving more resilient than their mainstream rivals as the economic downturn crimps consumer demand. The chain's fast-fashion formula of offering consumers catwalk styles at bargain prices has helped transform it into the world's third-largest apparel retailer by revenues behind Gap (GPS) and Spain's Inditex (ITX.F), which operates the Zara chain. H&M now boasts 1,822 stores in 34 countries.

Lining Up in America

Even in the U.S., long a graveyard for foreign retailers, H&M continues to do well. In the first half, the company opened two more stores, bringing its total there to 171, and it plans to open an unspecified number of additional outlets later this year. Since opening its first U.S. store on New York's Fifth Avenue in 2000, the chain's popularity has continued to grow. When H&M opened its first store in Atlanta last year, hundreds of people lined up the night before.

"Most U.S. apparel chains are doing badly on the basis that the American consumer is doing badly," says Howard Davidowitz, chairman of New York retail consultancy Davidowitz & Associates. "Consumers are trading down in general, and in fashion H&M is the beneficiary of that trend."

H&M understands that budget-conscious shoppers don't want to compromise on style. That's why Persson's predecessor, Rolf Eriksen, embarked on a series of successful collaborations with high-profile fashion designers and celebrities, from Japanese label Comme des Garçons to Italian fashion designer Roberto Cavalli and even pop star Madonna.

Its latest venture is with luxury British shoe and accessory brand Jimmy Choo, which rose to fame in part thanks to frequent appearances on the television hit show Sex and the City. Jimmy Choo will design a range of shoes and bags for women and men that will be available at 200 H&M stores worldwide from Nov. 14.

Premises Vacated by Woolworth

For H&M, the recession also presents an opportunity to score bargains of its own. The company is using the downturn to pick up prime real estate locations on the cheap and to secure better terms from landlords. In Britain, where H&M operates 149 stores, it has moved into several premises vacated by bankrupt chain Woolworths. It also plans to open a nearly 25,000-square-foot outlet at the upscale Bluewater mall in Kent, taking over space from another insolvent chain, music retailer Zavvi. Analysts say H&M managed to secure six months of the 15-year lease rent-free.

Keeping operating expenses under control will be critical as H&M expands during the recession. Over the past five years, the company has managed nearly to double its revenues, profits, and number of stores—even while increasing operating margins from 19.9% to 22.7% in 2008. Brokerage Sanford C. Bernstein (AB) forecasts H&M's 2009 aftertax profits will hit $3 billion on sales of $14 billion.

Still, the year ahead is likely to be one of H&M's toughest ever. Analysts reckon net earnings growth will fall below double digits for the first time in nearly a decade, and a lingering recession could unexpectedly crimp sales. It looks as if H&M's new CEO will have his work cut out for him.

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