H&M Reports ‘Good Start’ to June After Quarterly Profit Drop

Hennes & Mauritz AB, Europe’s second-largest clothing retailer, said June sales are off to a good start, providing some respite for investors after quarterly profit fell more than analysts expected.

Revenue for the period June 1 to June 17 rose 14 percent in local-currency terms compared with a year earlier, the Stockholm-based company said today. If maintained for the rest of the month, that would be the strongest growth since September. H&M rose as much as 2.3 percent in Stockholm trading.

The improved sales performance provided a tonic for the retailer, whose profit has been hurt by the strength of the Swedish krona, weakening European economies, and unseasonably cool spring weather. Second-quarter net income fell 11 percent, H&M said, about a week after Spanish competitor Inditex SA reported the slowest first-quarter income growth in four years.

“The good news is current trading, so that will likely be seen as encouraging,” said Anne Critchlow, an analyst at Societe Generale in London. “There is likely to be some pent-up demand for summer clothing coming through now.”

H&M shares rose 1 percent to 227.1 kronor at 12:37 a.m. in Stockholm. Before today, they were little changed this year, compared with an increase of 8 percent for the OMX Stockholm 30 Index.

Net income dropped to 4.66 billion kronor ($722 million) in the three months ended May 31, compared with the 4.87 billion-kronor average estimate of 18 analysts surveyed by Bloomberg.

’Substantial’ Impact

The krona’s gain against currencies such as the euro had a “substantial” impact on profit, H&M said, without quantifying it. Sales of 36.9 billion kronor in the quarter would have been 1.8 billion kronor higher using the same exchange rates as a year ago, the retailer said. The Swedish currency was on average about 5 percent stronger against the euro in the quarter.

“Sales were not satisfactory,” Chief Executive Officer Karl-Johan Persson said in a statement. Revenue fell 7.3 percent to 31.64 billion kronor, excluding value-added tax.

H&M’s gross margin narrowed to 61.1 percent of sales from 61.7 percent a year earlier as high inventory levels and the cold weather led to larger markdowns than planned.

“We are taking market share in a very tough, competitive market,” Persson said in an interview at H&M’s Stockholm headquarters. “Competition is getting tougher and tougher all the time, the best competitors are getting better and competitors are expanding and coming to new markets where they haven’t been before.”

Concept Expansion

The new chain & Other Stories is beating H&M’s expectations and the retailer will step up expansion of the concept, opening more than 10 new such stores next year, according to Persson.

H&M, purveyor of $12.95 leopard-print ballet flats and $5.95 tank tops, stood by proposals to add a net 350 stores this year and reiterated its intention to start selling garments online in the U.S. in August after previous delays.

“There is a huge potential for online sales there,” Soeren Loentoft Hansen, an analyst at Sydbank A/S, said by phone June 14. “By far the world’s biggest online market is in the U.S., and it is of course very important that H&M is able to have a share of this big and fast-growing market.”

Global Rollout

H&M is continuing work on a global rollout of its online business and is aiming to add several new countries during 2014 and 2015, Persson said at a news conference today. The retailer is increasing spending on Internet sales and new shop formats after falling behind Zara owner Inditex. H&M, which had 2,908 stores at the end of May, was overtaken by Inditex as Europe’s biggest clothing maker in 2006.

H&M has produced unchanged like-for-like sales on average over the past five years and has also underperformed Inditex on comparable sales over the past 10 years, according to Critchlow.

“The explanation lies in the differences between these two companies in terms of product and business model,” she said, adding that the underperformance will probably persist.