H&M Profit Misses Estimates as Discounting Weighs on Margin

Hennes & Mauritz AB reported fourth-quarter profit that missed estimates as Europe’s second-biggest clothing retailer stepped up discounting amid a battle for business in a market weighed down by mild winter weather.

Net income rose 6.1 percent to 5.61 billion kronor ($869 million) in the three months ended Nov. 30, Stockholm-based H&M said today, less than the 6 billion kronor average of 12 analyst estimates compiled by Bloomberg. The gross margin narrowed to 60.8 percent from 61.6 percent a year earlier.

H&M cut prices before Christmas as it sought to keep up with faster-growing competitors such as Inditex SA and the U.K. budget chain Primark. Inditex, which overtook H&M in 2006 as Europe’s biggest apparel seller, has topped the Swedish company’s sales growth for the past three years. Primark this month posted a 14 percent gain in quarterly sales.

“H&M’s revenue momentum continues to be strong, but after the positive gross margin development in the third quarter, declines have returned,” Simon Bowler, an analyst at Exane BNP Paribas, said in a note. “H&M’s sourcing model is reaching maturity and competitors are replicating it.”

H&M fell as much as 4.3 percent in Stockholm trading and was down 4.1 percent at 275.40 kronor as of 12:35 p.m.

The vendor of $5.95 tops, which sold a collection by French designer Isabel Marant in November, said markdowns in relation to sales increased by around 0.2 percentage points in the quarter compared with a year earlier. Discounting was spurred by unseasonably warm weather in Europe that caused shoppers to delay purchases of coats, jackets and sweaters.

New Competitors

“Competition is getting tougher all the time,” Chief Executive Officer Karl-Johan Persson said in an interview at H&M’s design department in Stockholm.

Existing rivals are getting better and are being joined by new competitors, Persson said, without naming them. Hard-pressed retailers in countries such as Spain, Greece and Italy are increasing discounts, he said.

Sales advanced by 12 percent to 36.5 billion kronor, excluding value-added tax, H&M said in December. The retailer said today it anticipates January sales will increase by 15 percent in local currency terms.

“We have great respect for the economic climate. I don’t think it will get a great deal better, I think it will get somewhat better,” Persson said about 2014.

Store Openings

H&M last year began selling online in the U.S., introduced the & Other Stories chain and expanded to countries including Chile. It’s set to open in Australia and the Philippines this year and in South Africa 2015.

Two other new markets, one of which is India, will also open this year, Persson said today. The retailer plans four “large” new online markets including France in 2014.

H&M said it will open 375 stores in the current financial year, up from 356 a year earlier, with most of the new outlets being in China and the U.S. The retailer had 3,132 stores in 53 countries as of the Nov. 30 year-end.

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