By Jens Hansegard
Fashion retailer Hennes & Mauritz AB Thursday said its net profit in the first quarter fell 30% from a year earlier on rising cotton prices, higher transportation costs and a stronger Swedish krona.
Europe's second-largest fashion chain by revenue said that net profit in the three months to Feb. 28 fell to 2.62 billion Swedish kronor ($414 million) from 3.74 billion kronor a year earlier, below analysts' consensus estimate of 2.73 billion kronor.
Revenue fell 1% to 24.5 billion kronor from 24.8 billion kronor, somewhat lower than analysts' expectations of 24.9 billion kronor.
While other fashion retailers have been raising prices to offset the steep rise in cotton prices, H&M said it's prepared to have lower margins in the near term because its more competitive prices will give it an advantage down the road.
The retailer said it hasn't changed its plan to open 250 new stores this year and plans to maintain its competitive pricing, even though its gross margin fell to 57.8% in the first quarter from 61.9% a year earlier, and it expects cotton prices to remain high.
"We expect the cost inflation to become more stable in the second quarter, but to remain tough," Chief Financial Officer Nils Vinge said in an interview.
Earnings were also hurt by the strength of the Swedish krona and the weakness of the euro, Chief Executive Karl-Johan Persson said. H&M sources its clothes predominantly in dollars from Asian manufacturers, but most of its sales are in euros. However, it reports earnings in the Swedish krona, which has risen about 8% against the euro in the last 12 months.
H&M's shares fell on the results, and were recently were down 3.4% at SEK209.20.
Despite maintaining its lower prices, H&M's sales in March until March 29 fell short of expectations, rising 3% in local currencies year-to-year instead of a forecast 6.2%. The company pointed out that March last year was particularly strong and included Easter, which falls in April this year.
Société Générale analyst Anne Critchlow said H&M's decision to sacrifice margin for lower prices "could be helpful from a market share perspective and prove to be a sensible investment for H&M in the medium to longer term."
Bank of America Merrill Lynch said H&M's aggressive pricing stance has improved its relative price competitiveness, but sluggish sales "will raise concerns that H&M is confusing customers, and pricing too close to discounters." However, the bank added that it expects sales in the second quarter to improve.
Total sales in February rose 9% from a year earlier, while sales in stores open longer than a year rose 1%. Analysts had expected total February sales to increase by 11% and same-store sales to increase by 2.4%.
