H&M is also planning four new online markets in 2014

H&M is also planning four new online markets in 2014

Swedish fashion retailer Hennes & Mauritz (H&M) has not ruled out the possibility of expanding its sourcing capacity to Africa as it embarks on entering new major markets in fiscal 2014.

The retailer this morning (30 January) outlined expansion plans for its new fiscal year as it revealed fourth-quarter earnings and sales figures.

As already announced, Australia and the Philippines will become new H&M countries this year and South Africa in 2015. But today, the retailer said a couple of other new markets are set to open at the end of the year, but did not reveal where.

H&M is also planning four new online markets in 2014. France will open in spring/summer, with an additional three "large" online markets planned for later in the year, it said.

H&M's sourcing policy has long been in the spotlight but its rapid expansion plans have again led industry observers to question whether H&M might look to move its sourcing capacity closer to its key markets, particularly Africa. At the present time, most of H&M's garments are sourced from factories in Asia, particularly Bangladesh.

Speaking on the firm's earnings call this morning, CEO Karl-Johan Persson told analysts it may be more a case of expanding capacity rather than moving it.

"We are continuously looking at the sourcing, just as we look at everything else like trying to improve efficiencies, new markets and new ways to produce. As we grow our retail operations, it's not a secret we will open in South Africa so it's only natural of course to look at sourcing in proximity.

"Nevertheless, we need to always look at capacity and growth since we have very ambitious plans for many years to come. So it's not about moving capacity from Asia to Africa, it's more about building even more capacity."

Expansion plans
Last year, H&M opened 356 stores, with China and the US its largest expansion markets. It added five new markets: Chile, Lithuania, Serbia, Estonia and franchises in Indonesia. This financial year, the group plans a net addition of around 375 stores, again with China and the US expected to be its largest expansion markets.

Persson told analysts: "We see great potential for further expansion in other markets too, including Russia, Germany, Italy and Poland. Several new flagship stores are planned in the absolute best locations.

"H&M's global expansion also takes place online. Following the successful launch of H&M online store in the US last year, the roll out to new markets will continue this year."

H&M this morning booked fourth-quarter profit that missed analyst expectations and "disappointing" margins. 

Pre-tax profit amounted to SEK7.34bn (US$1.13bn), an increase of 11% on last years SEK6.64bn. The figure, however, missed Reuters analyst forecasts for SEK7.6bn.

Gross margin fell to 60.8% from 61.6% in the corresponding period last year, primarily due to currency exchange rate effects.

Bernstein analysts described the results as "disappointing" and said that despite hints of a better sales performance in recent months, it remains skeptical that H&M can deliver strong sales growth without continued investment in price.

"Over the long term, we remain concerned by the competitive pressure from other value apparel retailers and input cost headwinds, and expect margins will continue to fall," the analysts at Bernstein said. 

Nonetheless, Persson offered an upbeat outlook for the new financial year, having ended 2013 on a "strong note".

"Although there are still macroeconomic challenges in several markets, we are still optimistic about 2014 which will be an exciting year with new countries and new opportunities for H&M. We have a strong belief in our offering and are convinced we will strengthen our market position even further during the year."

H&M's share price was down 3.06% to SEK278.60 at 14:39 GMT.