H&M profits fall 17% due to cold spring and strong dollar

Swedish fashion retailer Hennes & Mauritz (H&M) reported a 17% fall in second-quarter profits as a strong dollar increased costs and a cold spring affected sales.

Profit after financial items in the second quarter declined to SEK7bn from SEK8.4bn. The gross margin fell to 57.6% from 59.4%.

Net profits came in at SEK5.36bn, which was marginally below the SEK5.6bn predicted by analysts, down from SEK6.45bn in the year-ago period.

After taxes, earnings per share fell to SEK3.24 from SEK3.90.

The company’s revenues, including VAT increased by 5% in local currencies during the second quarter; converted into the Swedish kroner, sales including VAT increased by 2% to SEK54.3bn. Sales excluding VAT were SEK46.9bn up 2% year-on-year.

Sales in March and April were described as "significantly below plan", having been negatively affected by cold spring weather in many of the company's markets, but were much better in May, rising by 9% or 11% upon adjustment for calendar effects.

H&M said the strong dollar had a negative impact on purchasing costs for the third quarter, with increased markdowns also impacting profits. The company buys most of its clothes in Asia on dollar-denominated purchasing accounts and sells them mostly in Europe.

The company also said the low demand contributed in higher inventories in its third quarter. According to Credit Suisse analyst Simon Irwin “H&M and its peers are going to have to work very hard to shift this inventory over the next 6 weeks.”

Jamie Merriman, an analyst at Sanford C. Bernstein, told Bloomberg: “There is little in today’s results to suggest that earnings momentum will become more positive in the near term.”

Chief executive Karl-Johan Persson said: “Profits in the second quarter have been affected by a continued negative US dollar effect, but also by increased markdowns and the costs of our long-term investments.

“The fact that the sales increase in the quarter was below plan, naturally also had an impact on profits. It has been a challenging half-year for fashion retail in many markets, but we have great confidence going forward and are continuing to develop our offering further within all our brands.”

H&M has 32 e-commerce markets after opening nine new ones year-to-date, including in Japan and Greece. Canada and South Korea are due to launch in the autumn. The company has over 4,000 stores spread across 62 markets and was planning to open around 425 new establishments in the financial year 2015/2016, while expanding into Puerto Rico, New Zealand, Cyprus.

In 2017 the company was to open stores in between four to five new markets, including Colombia.

H&M’s shares rose 0.20% to 251.10p at 1349 BST.