Stockholm—Faced with higher cotton prices, rising labor costs in Asia and a strong Swedish crown, H&M, the “world’s No. 2 fashion retailer,” reported today a larger-than-expected decline in its second quarter profit.
Net income fell 18% to 4.26 billion kronor (about $670 million) from 5.21 billion kronor in the year-earlier period. A provision related to an incentive program also weighed on results, H&M said.
Third Straight Quarter of Declines
Analysts’ average estimate expected a 16% decline in profits on sales of 4.37 billion kronor.
H&M’s quarterly profit drop is the third in succession, the first time that’s happened in at least a decade. But conscious of its market share and low-price image, H&M said it stood by its strategy of not passing along costs by raising prices on its merchandise.
That helped send its quarterly gross margin down to 61.7% from a year-earlier 65.9% just below the average forecast for 62% retail analysts expected.
“We are optimistic about the future for H&M despite challenging conditions both in the sales markets and in the sourcing markets,” Karl-Johan Persson, H&M’s ceo, said in the statement.
“The biggest pressure, I guess, is commodity cost increases. And currencies aren’t helpful,” SG Securities analyst Anne Critchlow said. “H&M remains a long-term growth story. I think it is very difficult to argue against that. However, it looks as if earnings are falling in the current year, somewhere between 10 and 20%.”