Photographer: Patrick T. Fallon/Bloomberg

H&M Bucks Apparel Retailers’ Gloom as Profit Beats Estimates

  • Retailer’s shares gain as much as 6.2% in Stockholm trading
  • Company sees first-quarter pressure from purchasing costs

Hennes & Mauritz AB provided some much-needed good news for Europe’s struggling clothing retail market, reporting profit that topped estimates and accelerating sales growth while setting a new expansion goal to reflect an increasing online presence.

After missing estimates for five of the previous six quarters, H&M said fourth-quarter pretax earnings rose to 7.41 billion kronor ($839 million), exceeding the 7.04 billion-kronor average estimate. A previous target of boosting store numbers by 10 percent to 15 percent a year will instead become a sales target that includes both stores and online revenue.

The results provide a lift for Europe’s apparel retailers after a year when unseasonable weather, changing consumer spending priorities and the strength of the dollar all created challenges. H&M said sales growth accelerated in January, sending its shares up as much as 6.2 percent in Stockholm. Spanish rival Inditex SA, owner of the Zara chain, also gained.

The better-than-expected profit shows that pressures caused by the dollar’s strength and promotional activity are starting to ease, according to Berenberg analysts. Getting 80 percent of its product from Asia, H&M has endured cost pressure because many currencies in the region are linked to the greenback.

Fourth-quarter gross margins of 57 percent were down on last year’s 57.5 percent, though above the average estimate of 56.6 percent.

Looking ahead, the retailer said it expects a slightly negative effect on purchasing costs due to inflation and currencies in the first quarter. Still, profit this year is set to be helped by a gradual reduction in the pace of investment on new brands and online shopping.

Sales in the first 29 days of January rose 11 percent at constant currency rates, H&M also said Tuesday, an acceleration from December’s 6 percent.

New Brands

The company said it will continue its physical expansion, with 430 new stores planned this year, of which about 70 or 80 will be other brands than H&M, such as the COS, Monki and Weekday banners. A review of existing locations will be undertaken and some shops closed.

H&M plans to add one or two new brands this year, and it’s possible that a brand at some point in the future could be offered exclusively online, Chief Executive Officer Karl-Johan Persson said in an interview. E-commerce will be introduced in six new markets this year and H&M could have online sales available in all its markets by 2020, he said.

The Swedish retailer also said it will expand online options such as next-day shipments, currently offered in five markets, and time-slot deliveries available in Japan. The move is an attempt to get products to customers faster, an area where H&M needs to catch up with speedier rivals like Zara.

“Competitors were probably making the same type of commentary two or three years ago,” Tony Shiret, an analyst at Haitong Securities, said in a note.

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