H&M Says Dollar's Profit Squeeze Won't Lift in First Quarter

  • Shares drop as much as 4.5% after fourth-quarter profit miss
  • Asian sourcing means bulk of purchases are linked to dollar

An employee arranges a clothes rail dislaying garments for sale inside an H&M store in Budapest. The company reported fourth-quarter earnings that missed analysts’ estimates.

Photographer: Akos Stiller/Bloomberg

Hennes & Mauritz AB warned it sees no respite from currencies in the first quarter after the dollar’s strength added to purchasing costs and led to fourth-quarter earnings missing analysts’ estimates.

The effect of the greenback’s gains will remain as strong in the first quarter, then progressively diminish, the Stockholm-based company said in a statement Thursday. Pretax profit fell 8.4 percent to 7.15 billion kronor ($839 million) in the three months through November, trailing analysts’ expectations for 7.27 billion kronor. The stock fell as much as 4.5 percent.

“Guidance for the first quarter looks particularly weak,” Jamie Merriman, an analyst at Sanford C. Bernstein, said in a note. “It looks like there will be more currency compression and markdowns and this will make the total margin pressure greater.”

The retailer gets about 80 percent of its products from Asia, where clothing prices are often linked to the dollar, which contributed to gross margin narrowing to 57.5 percent from 60.4 percent. Unseasonably mild weather in countries including Germany, where H&M gets about a fifth of sales, also contributed to the weaker profit performance, especially in November.

The stock declined 4.1 percent to 284 kronor as of 1:50 p.m. in Stockholm, the biggest intraday drop in almost four weeks. The dollar was on average 10 percent stronger against the euro during the first two months of this quarter, while it was up 15 percent in H&M’s fourth quarter.

China Confidence

H&M plans to add 425 shops to its total this year, with a focus on the U.S. and China. The retailer plans about 80 additions in China after 83 openings in the world’s second-largest economy last year, Chief Executive Officer Karl-Johan Persson said in a presentation in Stockholm. 

“It’s still an uncertain market,” he said, commenting on that market. “Consumption is down and it affects us, too, but the long-term picture hasn’t changed.”

H&M also plans to offer e-commerce in nine more markets such as Japan and Greece in addition to the 23 where it already has online operations.

H&M forecast a January sales increase of 7 percent, on a basis that includes value-added tax and excludes currency shifts. The company also will start a new fashion brand next year to complement chains such as COS and & Other Stories, he said. That’s as H&M tries to close the gap with larger Spanish rival Inditex SA.

As the retailer opens bigger shops and adds more online businesses, H&M may eventually alter its expansion target, which has been to boost the total store count 10 percent to 15 percent a year, Persson said in an interview. It may be more relevant to focus on sales growth, he said. “It has nothing to do with that we don’t believe in the expansion potential.”

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