Major Retailer To Launch New Line Of Stores

hcsp.jpgHigh cotton prices and the cost of an ambitious expansion plan cut into margins at world number two fashion retailer H&M AB, dampening its first quarterly profit growth in more than a year.

H&M, whose shares fell 5 percent, said on Thursday it would launch an independent line of stores next year, but declined to say which price segment it would target after becoming famous for cheap and cheerful fashion.
The firm has struggled for more than a year with rising purchasing costs, a strong Swedish crown and an increase in bills for other items like wages in Asia and transport.
Unlike rivals such as Zara-owner Inditex SA, H&M chose to hold down prices to gain market share, further hurting its gross margin. But H&M’s CEO Karl-Johan Persson said he was confident about his strategy, which includes a rash of new store openings.
“We are making these long-term investments in order to build an even stronger H&M, so that we can give our customers an even broader offering,” Persson said in a statement.
The last few years have seen H&M launch on-line sales, its HOME concept and the upmarket COS line of stores, as well as the purchase of the Monki and Cheap Monday brands.
The new line of stores would open early in 2013, he said, without giving details of the market being aimed at.
“We think that it is going to be very big. We see a huge potential,” he said. The new stores would open in spring in a number of European countries. “We are also working on new concepts and new product categories,” he said.
To drive sales, H&M has also teamed up with designers and celebrities, including Madonna and Karl Lagerfeld.
H&M plans 275 new stores this year, with China, the United States and the UK markets as the main focus.
It will add five new markets, including its first stores in Latin America, and will start online sales in the United States.
Arch-rival Zara has more than twice the number of stores and an even wider range of offerings, something analysts say has helped it do better during the current downturn.
After profit slipped for five quarters in a row, H&M’s earnings grew again in the December-February period, measured against a year earlier, thanks to strong sales.
But profit was lower than analysts had expected, with the company blaming higher purchasing costs – particularly cotton – and discounts on its clothes needed to clear its stock.
Pretax profit came in at 3.7 billion Swedish crowns ($554 million) for the fiscal first quarter versus a year-ago 3.5 billion and a mean forecast of 4.2 billion in a Reuters poll of 18 analysts.
H&M’s gross margin came in at 55.8 percent, well below expectations of 57.6 percent and 57.8 a year ago.
“The gross margin was a real surprise,” said Nicolaj Jeppesen, analyst at Sydbank. “I had expected that we would begin to see a lift on the gross margin from sales growth this quarter, but clearly we will have to wait one more quarter for that.”
Shares in H&M have outperformed the blue-chip Stockholm index with a rise of 12 percent since the start of 2012, but were down 5 percent at 0917 GMT.
The group said sales at the start of the year had been strong, despite the debt crisis and austerity measures across much of Europe, which is H&M’s biggest market.
H&M said the trend had continued, with sales up 22 percent in local currencies compared with the same period a year ago over the period March 1 to 27.
Inditex, the world’s top clothing firm by sales, saw profit rise 12.5 percent to 1.9 billion euros ($2.5 billion) in the year to end January. Store sales in local currencies rose 11 percent over Feb 1 to March 14. ($1 = 6.6818 Swedish crowns)  
Source: Reuters
(Additional reporting by Rebecka Roos; Editing by David Holmes)