H&M Looks Beyond Profit Drop With Accelerated Expansion Plan

Hennes & Mauritz AB plans to ramp up expansion, including more stores for its new “& Other Stories” brand, as Europe’s second-largest clothing retailer looks beyond a decline in first-quarter profit.

H&M will open 350 outlets this year, up from a previous forecast of 325, and intends to enter Australia in 2014, the Stockholm-based company said today. Most of this year’s openings will take place in Asia and the U.S., the retailer said.

Sales at “& Other Stories” have “far exceeded” the company’s expectations since the brand went on sale in stores and online this month, said Chief Executive Officer Karl-Johan Persson. Still, first-quarter profit fell 10 percent because of a strong Swedish krona and as sales were hurt by a prolonged spell of freezing weather in northern Europe, the retailer said.

Faster expansion “should improve the longer-term growth profile,” Adam Cochrane, an analyst at UBS AG, said in a note.

H&M rose 1.9 percent to 231 kronor at 11:34 a.m. in Stockholm trading, trimming the 12-month decline to 5.8 percent.

The initial performance of “& Other Stories” makes it possible that the brand can expand “more widely and faster than we originally planned,” Persson said. Items such as a mint leather shoulder bag costing 125 euros ($161) and 55-euro red leather ballerina shoes are currently available at its first store in London and online. H&M has said it plans seven stores dedicated to the label in European cities including Paris and Milan, as well as online in 10 European countries.

Beyonce Partnership

H&M, the purveyor of 10-euro studded T-shirts, is seeking to expand its customer base by adding shop formats after falling behind Spanish competitor Inditex SA. The operator of 2,818 outlets said today it’s sticking to a goal to increase store numbers by 10 percent to 15 percent a year.

Also today, the retailer announced a partnership with Beyonce that will see the singer appear in television and billboard ads for H&M’s summer collection and said it will introduce more sport products at the beginning of 2014.

Net income at the Swedish company fell to 2.46 billion kronor ($380 million) in the three months ended Feb. 28, H&M said. That compared with the 2.57 billion-kronor average estimate of 17 analysts surveyed by Bloomberg. At 55.2 percent of sales, the gross margin was the lowest since 2004 as the retailer stepped up discounting to gain customers.

More Markdowns

“H&M has a clear long-term strategy to gain market share through offering the best value to its customers,” said Christodoulos Chaviaras, an analyst at Barclays Bank Plc, in a note. “This comes at the expense of short-term profitability.”

Gross margin narrowed from 55.8 percent a year earlier, with increased markdowns reducing the measure by 0.5 percentage point. Cotton prices, cost inflation and the U.S. dollar had a neutral effect on purchases, H&M said.

Inditex said last week profit increased at the slowest pace in five quarters, missing analysts’ estimates as a weak Spanish economy damped consumption in its home market.

H&M’s first-quarter sales converted into Swedish currency rose 2 percent to 28.39 billion kronor, excluding value-added tax, the company said March 15. In local currencies, including VAT, sales rose 6 percent. H&M said today that the difference was due to the Swedish krona strengthening against the currency of most countries where it has business. Revenue at stores open at least a year declined 3 percent during the period.

“The currency effects both in terms of the transaction impact on the gross margin and the translation impact on sales should improve as the year progresses,” said Anne Critchlow, an analyst at Societe Generale SA in London.