• Q3 profit edged up 0.2% to SEK5.31bn
  • Gross margin dropped to 55.9%
  • Sales were up 19% to SEK46.02bn
H&M was affected by the strong US dollar in the third quarter

H&M was affected by the strong US dollar in the third quarter

Swedish fashion group Hennes & Mauritz (H&M) saw earnings edge up just 0.2% in its third-quarter, affected by the strong dollar, and reiterated its store expansion plans for this year. 

Profit after financial items in the three months to the end of August edged up to SEK5.31bn (US$631.2bn) from SEK5.30bn a year earlier.

H&M said the quarter was negatively affected by external factors such as raw material prices, cost inflation, capacity at suppliers, purchasing currencies and transportation costs, mostly due to the stronger US dollar.

Gross margin dropped to 55.9% from 58.3% a year earlier, again due to the stronger dollar. H&M sources most of its clothes in Asia where it pays in dollars.

Bernstein analyst Jamie Merriman noted: "Markdowns increased 0.3% year-on-year, due to increased markdowns in August when sales were weak. This is consistent with our view that higher manufacturing costs, US dollar strength and price pressure will continue to lead to gross margin compression."

Stifel analyst Richard Jaffe suggests that despite the increased costs, "we believe H&M did not pass the cost increases on to its customers in order to be the lower-cost provider and gain market share.”

He also sees the weakening Chinese yuan as partially offsetting the rising USD exchange rate. “While H&M sources its merchandise in USD, a weakening yuan helps H&M’s buyers to negotiate better sourcing costs, benefiting gross margins.”

Sales in the quarter were up 19% to SEK46.02bn from SEK38.81bn in the prior year, although August was negatively affected by unseasonably warm weather in the larger European markets. Sales, however, picked up in September, increasing 12%.

In the first nine months of the year, profit after financial items grew 19% to SEK20.09bn, while sales were up 22% to SEK132.17bn.

Total inventory also increased 40% in SEK and 38% in local currencies, partly due to expansion and higher purchasing costs. But Jaffe also points out the increase is due to a change in the administrative process surrounding invoice management for goods purchasing as part of the work to streamline and simplify the process. "In the new process, invoices for goods purchases are earlier, which means that the size of the reported inventory and accounts payable will increase with effect from the third quarter of 2015."

In the fourth quarter, H&M plans to open around 240 new stores. India and South Africa will be two new countries for the retailer this autumn when its first store opens in New Delhi next week and Cape Town in October. Next year, stores will open in three new markets: New Zealand, Cyprus and Puerto Rico.

CEO Karl-Johan Persson highlighted work being carried out by H&M on its strategy for Fair Living Wages, which he said is showing “good progress”.

“Now more and more of our suppliers will start using the Fair Wage method to achieve fairer wage setting for their employees. In addition, thanks to the commitment of our customers we have now collected almost 20,000 tonnes of garments for re-use and recycling since 2013.”

Looking ahead, Jaffe notes: “Sales trends thus far in the [fourth quarter] have improved as more seasonable weather in Europe is fuelling customer demand for the company’s on-trend fall merchandise offerings.

“However, we expect the continued long-term investments for IT, e-commerce, the broadening of the company’s product range and the negative impact of the strengthening US dollar on sourcing costs will hold back results in the near term.”