• Q2 net profit falls 17% to SEK5.3bn (US$649.5bn)
  • Sales including VAT increased 2% to SEK54.34bn
  • Gross margin narrows to 57.6% from 59.4%
Analysts say “little to suggest” earnings moment will become more positive in the near term

Analysts say “little to suggest” earnings moment will become more positive in the near term

Swedish fashion giant H&M has blamed higher purchasing costs due to the strengthened US dollar and increased markdowns for a 17% fall in its second-quarter profit.

For the three months ended 31 May, the retailer saw net profit fall to SEK5.3bn (US$649.5bn) from SEK6.4bn a year earlier, with gross margin narrowing to 57.6% from 59.4% in the previous year. Sales including VAT increased 2% to SEK54.34bn, and without VAT reached SEK46.87bn from SEK45.87bn.

"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," says Karl-Johan Persson, CEO.

"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."

For the six month period, group sales including VAT increased by 5% to SEK104.96bn, and excluding VAT amounted to SEK90.56bn from  SEK86.14bn a year earlier. Profit after tax decreased to SEK 7.9bn from SEK10.1bn in the prior year.

Despite beating their lowered consensus for the second quarter of the year, analysts at Bernstein say there is little to suggest earnings momentum will become more positive in the near term. Jamie Merriman writes: "We expect gross margins will continue to be under pressure in 2H, given the high inventory level and expect markdowns will continue to be elevated."

Bernstein expects to see "longer term pressure" on operating costs as H&M continues to increase its long-term investments.

H&M says it plans to launch online in Canada and South Korea later this year and continue its fast roll-out in 2016, while opening stores in five new markets, of which Colombia will be one.

The company posted a monthly sales increase in May with group sales including VAT increased 9% in local currencies compared to the same month the previous year.

H&M sales growth picks up in May