H&M Q1 Profit Misses Forecast as Costs Rise

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H&MStockholm–H&M  posted a slimmer first quarter profit, hit by external factors including currency movements and cost inflations especially on cotton.

Net income sank 30% to 2.62 billion kronor (about $420 million) in the quarter ended Feb. 28 from 3.74 billion kronor (about $557.8 million) from the year-earlier period, the company said in a statement today. That was even below what analysts average estimates of 2.77 billion kronor which took into account a decline.

Sales for the quarter were up 9% in local currencies, and comparable store sales rose 1%, but fell 1% in reported terms due to the strength of the Swedish kroner. H&M added that its sales for the March 1 to 29 were up 3% in local currencies, despite strong comparatives including last year’s earlier Easter holiday.

Gross Margins Reduced Rather than Passing Costs to Consumer

Karl-Johan Perssonm ceo, characterized the quarter as “continued tough market” with many external factors exerting a negative influence on performance. “These external factors, which were beyond our influence, were for example strong negative currency effects and cost inflation in the sourcing markets with, for example, significantly higher cotton prices,” he said. “Instead of passing on these cost increases to customers, we chose to strengthen our price position in order to build further on our strong market position for the long term.”

Indeed, H&M, which buys its merchandise from some 700 suppliers, has actually reduced prices on some apparel and accessories even though cotton is trading at record highs.

“H&M is making a massive bet on market-share gains,” Simon Irwin, an analyst at Liberum Capital in London, told Bloomberg News. “They’re cutting prices in an environment where their costs are rising and competition is increasing.”

Although larger rival Inditex, operator of Zara, reported a 10% jump in its fourth quarter in January, the company said it would be “maintaining” retails on key items. However, H&M sources two-thirds of its merchandise out of Asia compared with Inditex’ 35% supplied from Asia and only half of that comes from China where costs are rising the fastest.

“H&M has chosen to reduce its prices in the current environment, which further hurts the gross margin,” said Anne Critchlow, analysts at Societe Generale. “Inditex says its prices are maintained.”

H&M’s gross margin in the first quarter was 57.8%, compared with 61.9% a year earlier.

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