Stockholm—H&M, the world’s second largest fashion retailer, reported today an unexpected drop in its fourth profits due in part to its investment its new retail brand that opens this year.
For the quarter ended Nov. 30, 2012, the retail giant posted net profit down about 1.3% to 5.29 billion kronor (about $825 million) compared with 5.36 billion kronor a year earlier. Analysts’ average estimate had forecast an unchanged profit.
The earnings decline broke a three quarter streak of rising profits at a time when the Swedish kronor is on the rise and much of its European business is in markets that are feeling the pinch of governmental austerity measures.
Total net revenue rose 5% to 32.5 billion kronor from 30.95 billion kronor a year earlier. Comparable store sales were unchanged. Gross profit margin narrowed to 61.6% from 61.9%, matching forecasts.
H&M also continues to expand, opening 304 new stores last year and planning to open 325 more this year with most of those being built in the United States and China.
‘Investments Necessary and Wise’
Part of the estimated $1.09 billion in costs are related to store expansions, including the launch of the new & Other Stories, expanding e-commerce (including the United States) and opening in stores in emerging markets.
“These long-term investments have created cost increases and to a great extent have not yet generated any revenue,” Karl-Johan Persson, chief executive, said. “However, we consider these investments to be both necessary and wise as they aim to secure future expansion and profits and thereby further strengthen H&M’s position.”
Indeed while H&M has more than 2,800 stores in 48 countries, it is still behind Inditex, owner of Zara, in size.
However, H&M’s sales slowdown affected by cold weather may continue into January when the company expects sales to increase again by 5%.
“These are disappointing results, as management continues to step up investment in both the product and longer term initiatives, yet sales performance has not rebounded,” said Bernstein analysts.
“For the medium term, they’re trying to develop more brands, they’re entering five new countries this year, they’re laying down 12 percent more space…So in terms of their own strategy, I actually think that they are sticking to it, and it makes long-term sense,” said Adam Cochrane, analyst at UBS.