• Third quarter profits climbed 13%
  • Let down by 11% dip in August sales
  • Analyst predicts continued under-performance

Swedish fashion chain H&M posted 3.9% third quarter profit growth this week, but disappointed analysts with an 11% dip in August same-store sales.

The company's quarterly profit climbed to SEK3.46bn (US$506m), thanks to a 13% rise in total sales during the period to SEK23.55bn.

The double-digit growth, together with the top spot among fashion retailers in last week's Interbrand rankings, should have been music to the ears of investors.

However, financial research group Standard & Poor's (S&P) has predicted continued under-performance from the Swedish chain, mainly due to the retailer's more recent form.

Indeed, H&M also revealed yesterday (25 September) that same-store sales dropped 11% in August from the same month last year. It meant the third quarter, which ended 31 August, had ended with a whimper.

S&P analyst Alessandra Coppola said: "Management came under unusual pressure during the conference call, in our view, with heavy questioning particularly regarding their argument that sales in an unseasonably warm August disappointed as a consequence of insufficient merchandise."

H&M blamed the bad ending to the quarter on a lack of stock, owing to the unprecedented demand beforehand, and a washout during the summer sales period.

"During the recession customers have become more attracted to markdowns. H&M's summer sale sold out quickly resulting in fewer markdown items left for H&M in August compared to the market in general," it said.

In fairness, the 13% rise for the full third quarter supports this theory, but begs questions about H&M's preparedness for such success.

Coppola added: "At worst we believe this is a possible signal that management expected even poorer sales than transpired (stocking cautiously to avoid unnecessary markdowns).

"At best, that this might be an indication of insufficient contact with the stores to ensure product-mix adjustments to suit the unusual temperatures.

"Against this weak sales environment, FY 09 store openings will accelerate (to 240 from 225), which implies confidence, but could also possibly be an attempt to make up for any same-store revenue disappointment."

H&M's caution during a recessionary period was wise in many ways, but also a lesson about striking the balance between cutting inventory and cutting sales.