H&M Posts Profit, But Misses Analysts Estimates

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Europe’s second-largest clothing retailer, H & M Hennes & Mauritz AB (STO:HM-B), reported a profit for the third quarter that missed the analysts’ estimates. The retailer is also struggling to its start online operations in the U.S. on time, as it tries to match rival Zara owner Inditex SA. Inditex, also announced its earnings report last week, with profits exceeding the analysts’ expectations.

H&M Posts Profit, But Misses Analysts Estimates

The Stockholm-based company’s net income for the quarter ending Aug. 31 rose by 0.9 percent to 3.62 billion kronor ($550 million) against a 4.05 billion-kronor average estimate of 14 analysts, compiled by Bloomberg. The revenues for the retailer increased by 10 percent at local currency rates, while the gross margins shrank from 58.6 percent a year earlier, to 58.2 percent. Inditex revealed last week that its gross margin widened to 59.6 percent in the first half, from 58.4 percent a year earlier.

“Inditex is fast-fashion, so it has a compelling product, which sells whatever the weather, whatever the macro-economic conditions,” said Anne Critchlow, a London-based analyst at Societe Generale. “Inditex is rolling out online very rapidly, boosting like-for-like sales growth, and has very high exposure to fast-developing emerging markets.”

Commenting on the results, the company said, margins squeezed due to the increased costs in Asia. H & M Hennes & Mauritz AB (STO:HM-B) also said that low cotton prices, which were expected to boost profitability, had a “neutral to positive effect.” Apart from this, strengthening of the krona against the euro, reduced profit by about 200 million kronor. “I’m surprised that cotton was not more of a benefit to gross margin in the third quarter, because the commodity price more than halved last year — the benefit should now be flowing through to H&M,” Critchlow said. The Swedish company sources 75 percent of products from Asia, while Inditex gets 50 percent of its merchandise from “proximity countries,” mainly Spain and Portugal, and 15 percent from Turkey

About its online operations in US, the company’s Chief Executive Officer Karl- Johan Perssonsaid that it will get delayed until summer next year, as adapting to the market there took longer than expected. Revealing its upcoming plans, the company said that it will add about 300 outlets in the financial year through November, compared with a previous estimate of 275.

Due to the slowdown in the European consumers’ spending, the retailer has focused expansion on Asia and the U.S. “Conditions in the fashion retail industry continued to be challenging in many markets — both as regards the weather and the macroeconomic climate,” H&M’s Persson said in a statement.

The coming quarter looks good for the company, as the sales from September 1st to 25th were up 14 percent after adjusting for calendar effects and currency shifts. The cloth retailer expects the impact of sourcing and currency shifts to be “neutral” in the fourth quarter.

H & M Hennes & Mauritz AB (STO:HM-B)’s stock lost around 5.1 percent in Stockholm trading, the steepest drop since May 4. This year, the stock has gained 5.9 percent, but trails well behind the 54 percent gain of Inditex’s stocks.

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