Bloomberg News

H&M Profit Drop Beats Estimates as Margin Damage Contained

September 29, 2011

(Updates with analyst’s comment in sixth paragraph, CEO quote in 11th.)

Sept. 29 (Bloomberg) -- Hennes & Mauritz AB, Europe’s second-largest clothing retailer, reported a drop in third- quarter earnings that beat analysts’ estimates as the company contained the impact of higher cotton prices and wages in Asia.

Operating profit fell 17 percent to 4.71 billion kronor ($700 million) in the three months ended Aug. 31, Stockholm- based H&M said today in a statement. The average of 17 analyst estimates compiled by Bloomberg was 4.35 billion kronor. The gross margin narrowed to 58.6 percent from 60.5 percent a year earlier, beating the 57.8 percent average estimate.

H&M shares rose to the highest in more than a month. In addition to a near doubling in the price of cotton last year, the retailer has also had to contend with higher labor expenses in Asia, where it gets about 75 percent of its clothes. Future earnings may benefit from a 54 percent decline in cotton prices since they surged to a record in March.

“Gross margin is a relief,” Jan Meijer, an analyst at ING Commercial Banking in Amsterdam, said in an e-mail. “The market was worried that H&M margins would be impacted heavily by higher cotton prices and wages in Asia.”

H&M gained as much as 5.7 percent in Stockholm trading and was up 9.2 kronor, or 4.7 percent, at 205 kronor as of 1 p.m.

Higher Inventory

“The third quarter could have been a lot worse from an input costs perspective, given higher cotton costs still filtering through to the company,” Societe Generale analyst Anne Critchlow said in an e-mail today.

H&M said margins were affected by high cotton prices and the impact of currency shifts on buying expenses. H&M pays for about three-quarters of its products in dollars.

The retailer, which plans to start a collection designed by Donatella Versace in the fall, increased its target for store openings this year to 265 from 250. The start of an online store in the U.S. has been pushed back to the fall from spring 2012.

“H&M is the strongest space expansion story under our coverage in the clothing retail subsector,” said Critchlow, who has a “buy” recommendation on the stock.

H&M said inventory rose 26 percent to 13.3 billion kronor in the third quarter, partly because of expansion and higher purchasing costs, and also due to lower-than-planned sales.

“H&M continues to gain market share in a challenging environment for the fashion retail industry,” Chief Executive Officer Karl-Johan Persson said in the statement.

Sales this month have risen 3 percent to date, H&M said, down from 8 percent growth in August, as warmer-than-average weather in much of Europe weighed on clothing purchases.

“Current trading is poor and inventory is a real concern,” said Liberum Capital analyst Simon Irwin.

--Editors: Paul Jarvis, Marthe Fourcade.

To contact the reporter on this story: Armorel Kenna in Milan at akenna@bloomberg.net

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net


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