H&M Reports Strongest Profit Growth in More Than Four Years

Hennes & Mauritz AB, Europe’s second-biggest clothing retailer, reported the strongest quarterly profit growth in more than four years as new store formats and online expansion fueled sales growth.

Net income rose 25 percent to 5.81 billion kronor ($870 million) in the three months through May, Stockholm-based H&M said in a statement today. The average of 16 analyst estimates compiled by Bloomberg was 5.63 billion kronor. Sales have got off to a good start in June after rising 20 percent to 37.8 billion kronor in the second quarter, the company also said.

The vendor of $24.95 imitation-leather skirts is investing in geographic expansion, new selling formats and e-commerce amid increasing competition from online retailers such as Asos Plc and budget chains including the U.K.’s Primark. Profit growth is likely to weaken in the second half, according to analyst estimates, weighed down partly by the cost of expansion.

“These results underpin our full-year earnings forecast agenda,” Richard Edwards, an analyst at Citigroup Inc. in London, said in a note. He predicts profit growth will slow to 14 percent for the year and has a buy rating on the stock.

H&M shares rose 0.4 percent to 292.8 kronor at 11:28 a.m. in Stockholm, trimming this year’s decline to 1.2 percent.

The second quarter was better than planned, Chief Executive Officer Karl-Johan Persson said at a press conference, adding that the retailer is continuing to gain market share.

Profit Margins

A decline in the gross profit margin to 60.8 percent from 61.1 percent a year earlier was more than offset by “very good” cost control, the company said. Operating profit as a percentage of sales widened to 20 percent from 19 percent.

External factors, such as cost inflation, were “slightly negative” and that will persist in the third quarter, H&M said.

Profit for the year through November will gain about 14 percent to 19.5 billion kronor, according to the average estimate of 24 analysts compiled by Bloomberg.

H&M said today that it plans to open as many as 10 new online markets next year and reiterated plans to add 375 stores in 2014. Plans also include openings in countries such as India and a Chinese Web shop, the retailer has said.

An extended shoe range will be introduced in selected H&M stores in the second half of the year. The collection will appear in nine countries and in online markets, H&M said.

Bigger competitor Inditex SA this month reported fiscal first-quarter net income that topped analysts’ estimates as the owner of the Zara brand limited expansion costs by relying more heavily on e-commerce for growth.

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