Rising Costs Cut Into H&M

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H&M's spring advertising

Stockholm—Citing the impact of increased raw materials costs, especially on cotton, H&M reported today that its fourth quarter net profit dropped by 11%.

Net profit fell to 5.49 billion kronor (about $846 million) for the quarter ending Nov. 31, 2010, from 6.15 billion kronor in the same period 2009. The earnings missed analysts’ average estimates 5.98 billion kronor.

Sales grew 6%, nonetheless, to 34.8 billion kronor, from 32.8 billion kronor a year earlier, which was somewhat down due to the strong Swedish krona. Excluding currency fluctuations, sales increased by 15%, the company said.

Gross margin dropped to 63.2% from 66.3% which H&M attributed to significantly higher prices of cotton, less spare capacity at the suppliers and higher transportation costs.

“Raw material prices have increased; cotton prices for example almost doubled in 2010. Naturally, H&M has to adapt to changing conditions but always in a way that is in accordance with our business concept to offer customers fashion and quality at the best price,” Karl-Johan Persson, ceo, said in a statement. “In that way increase the opportunities for us to continue to take market shares.”

More Stores, E-Commerce Planned for U.S.A.

H&M buys an estimated 70% of its raw materials in U.S. dollars, which have strengthened against the euro in the final quarter last year. About 60% of retailer’s sales, however, are in euros—only 10% in dollars.

“Inditex (which operates rival Zara) is far better placed than H&M to handle higher commodity costs,” Simon Irwin, an analyst at Liberum Capital, told Bloomberg News today, noting that H&M’s profit missed his estimate by 10% because of the weaker margins. “There’s clearly a value element in H&M’s offer and it appears that H&M can’t or doesn’t want to pass on higher costs if its competitors don’t,” he added.

Persson said the company is “optimistic about the future” and expects to increase sales in comparable units in 2011.

Selling and administrative expenses in the quarter increased by 10 percent to 11.7 billion kronor, due to expansion costs and increased efforts to further strengthen the H&M brand, it said. The company proposed a dividend to shareholders of 9.5 kronor per share, up from 8 kronor last year.

This year, H&M plans to open around 250 new stores, mostly in the United States, United Kingdom and China, but also plans its first stores in Romania, Croatia and Singapore, as well as franchise stores in Morocco and Jordan.

H&M also said it plans to improve its  e-commerce capacity, including launching online sales in the United States at the end of the year.