A combination of high stock levels and increased production costs in Asia did not prevent Swedish retailer H&M making strong profit growth in the first half of the year.

Meanwhile, the chain will continue its aggressive international expansion plans of 10-15% growth in annual store numbers.

H&M ends the first half with more stock in trade than planned, but its summer sales have now begun.

"We have been working to control the stock levels better," H&M CFO Jyrki Tervonen told analysts today (24 June). "We have more spring garments than planned but have just started our summer sales."

The weakening Euro, increased labour costs in China and the revaluation of the Chinese yuan are all expected to bump up sourcing costs for retailers in the coming months. Around a third of H&M's sourcing is from China.

Tervonen says: "We can see the demand for spare capacity is increasing. Also, cost inflation is getting much more negative than it has been."

H&M is "looking at how the market reacts" to sourcing woes in Asia, which also include labour protests in Bangladesh.

However, the Swedish retailer is modelled on a low price point, and would be one of the last on the high street to let sourcing costs filter through to the consumer.

"It is a mixed picture. Some retailers say they will increase prices, but others will absorb the margins," Tervonen says. "We have invested in a cost mission and will continue to do that, even when external factors become negative. Our aim to offer quality at the best price."

H&M's profit after financial items amounted to SEK12bn in the first six months of the year, an increase of 30%. Group sales during the period increased 4% to SEK51.88bn (US$6.67bn).

However, the company's stock-in-trade consisted of more spring garments than estimated due to a weaker sales development than planned during April and May.

Expansion plans
During the second half-year, the group plans to open 180 stores and close 14, with most planned for Germany, US, UK, France, China and Italy.

Meanwhile, H&M has signed a contract to open its first store in Turkey, planned to open in November 2010.

The company has slated its first stores in Croatia, Romania and Morocco next year, and announced that it will commence online sales in the UK from September 2010.

Therefore, it is clear H&M's expansion plans will carry on regardless of the odd sourcing glitch or bad sales month.

After all, you don't amass 2,062 stores in four continents without the odd challenge here and there.