H&M Misses Q1 Profit Forecast, Plans New Chain in 2013

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Summertime at H&M

Stockholm—H&M reported today that its first quarter profits were lower than expected due in part to its gross margin eroding policy of absorbing costs instead of passing them onto consumers. The retail giant also announced it will open a new retail concept in 2013.

For the quarter March 27, the company posted a pretax profit of 3.7 billion kroner (about $554 million), compared with 3.7 billion kroner a year ago. Analysts’ average estimate expected 4.2 billion kroner.

Sales rose 13% to 27.8 billion kroner. Comparable sales increased 3%. Gross margin also failed to meet expectations, narrowing to 55.8%, missing the estimate 57.6%.

The company blamed the misses on higher costs, particularly due to cotton prices, as well as on markdowns to clear inventory.

But Karl-Johan Persson, ceo, said H&M continued to take a long-term perspective, by considering consumers and not raising prices, a move that the retailer says it garnering it more market share.

New Chain to Be Aimed at Luxury Consumers?

“Despite increased purchasing costs, we have continued to strengthen our customer offering–for example, by not raising our prices to customers,” Persson said. “This has contributed to strong sales even if, combined with the increased purchasing costs, it has had a negative effect on the gross margin in the quarter.”

So far this month, H&M said sales were up 22% compared to March 2011. “Sales have been good in most markets and have been particularly strong in big markets such as the US, UK, Germany and France, while sales have been weaker in Switzerland, Japan and Greece,” the company said.

Persson also announced that H&M would be opening a new retail brand. “The new chain of stores will be independent and complement the other offerings from the groups.”

Though the company didn’t elaborate much beyond that, the announcement coincides with rumor circulating that the new division may target the luxury market with retail prices higher than those at the “COS” or Collection of Style stores launched in 2007. Behnaz Aram, former Whyred designer, recently joined H&M’s business team, another indication that a higher-end retail venture is in the works.