H&M Profit Rises 28% on New Stores, Dollar's Decline

27 Mar 2008 • by Natalie Aster

Hennes & Mauritz AB, Europe's second-largest clothes retailer, said first-quarter profit rose 28 percent, beating analysts' estimates, because of store openings, online shopping and a declining dollar, reported The Bloomberg.

H&M rose as much 5 percent in Stockholm trading, the most in almost two months. Net income in the three months through February climbed to 2.94 billion kronor ($493 million), or 3.55 kronor a share, from 2.3 billion kronor, or 2.78 kronor, a year earlier, the Stockholm-based retailer said today. That beat the 2.8 billion-krona average estimate of seven analysts.

H&M is planning its first Japanese and Saudi shops as part of a goal to open 190 outlets this fiscal year, mostly in the U.S. and Europe. The retailer is also expanding its Internet offering. While declines by the dollar erode the value of H&M's American sales, they bolster profit by reducing the cost of buying garments in Asia, where H&M does most of its purchasing.

``This is a set of strong results,'' said Christian Nagstrup, an analyst at Jyske Bank A/S in Denmark. ``Internet and catalog sales are benefiting sales growth, and if they have the right collections they do well. The general trend for H&M is positive.'' He recommends investors buy the shares.

H&M rose as much as 17 kronor to 355 kronor and was up 15 kronor, or 4.4 percent, at 353 kronor as of 11:55 a.m. local time, the steepest gain since Feb. 1. The shares have dropped 10 percent this year, less than larger rival Inditex SA's 14 percent decline. Gap Inc.'s stock has declined 3.2 percent.

First-quarter sales advanced 18 percent to 19.74 billion kronor, H&M said. Revenue at outlets open at least a year climbed 10 percent in February, more than January's 3 percent growth. Analysts had estimated February sales growth of 3.9 percent, according to a SME Direkt survey.

The gross margin widened by 0.7 percentage points to 59.6 percent in the quarter, while selling and administrative costs in relation to revenue increased by 0.7 percentage points. H&M had ``a marginally higher level'' of price reductions in the quarter and increased transportation costs, it said today.

``H&M has the highest, most durable growth in the sector,'' JPMorgan Chase & Co. analyst Richard Chamberlain said in March 25 note. ``The company is well placed to exploit the growth of online sales. H&M's low-priced offer should enable it to take further market share as it has done in previous consumer downturns.'' He rates the shares ``overweight.''

Total revenue last month gained 24 percent, excluding currency swings. H&M introduced online sales in Germany and Austria last year, and in the Netherlands in 2006. The company doesn't provide any information about its Internet sales and profit. Sales in the quarter rose by 16 percent in local currencies and 3 percent at stores open at least a year.

``The good sales development is mainly due to well composed collections and expanded Internet and catalog sales and a slightly positive calendar effect,'' H&M said in the statement.

H&M faces ebbing consumer confidence in the U.S. and Europe as higher bills feed inflation, leaving people with less to spend. Competition may also increase for the Swedish retailer as the declining dollar boosts global revenue for U.S. companies such as Abercrombie & Fitch Co., the first U.S. teen retailer to open its own European stores. It's opening one in Tokyo and four in the U.K., and may set up more in Paris, Copenhagen and Milan.