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H&M's profit comes in below market estimates

H&M trails Zara's Inditex in fast-fashion retail stakes

Swedish retailer's profit comes in below market estimates amid heatwave and higher labour cost


Hennes & Mauritz (H&M), Europe's second-biggest clothing retailer, reported third-quarter profit that missed estimates and delayed the start of online operations in the United States, as it falls further behind Zara owner Inditex.

Net income rose 0.9 per cent to 3.62 billion kronor (HK$4.26 billion) in the three months ended August 31, Stockholm-based H&M said yesterday, compared with the 4.05 billion-kronor average estimate of 14 analysts.

H&M fell the most in almost five months in Stockholm trading. The retailer has struggled to keep pace with the growth of larger competitor Inditex, which last week reported profit that beat estimates. H&M said profit margins shrank in the quarter, hurt by higher costs in Asia, a week after saying a heatwave in Europe caused sales to miss estimates.

"Inditex is fast-fashion so it has a compelling product which sells whatever the weather, whatever the macroeconomic conditions," Anne Critchlow, a London-based analyst at Societe Generale, said. "Inditex is rolling out online very rapidly, boosting like-for-like sales growth and has very high exposure to fast-developing emerging markets."

While H&M's sales in the quarter increased 10 per cent at local currency rates, the gross margin narrowed to 58.2 per cent from 58.6 per cent a year earlier, the company said. Inditex said last week that its gross margin widened to 59.6 per cent in the first half from 58.4 per cent a year earlier.

Lower cotton prices, which analysts had expected to boost profitability, had a "neutral to positive effect", H&M said. Currency shifts, mainly the strength of the krona against the euro, reduced profit by about 200 million kronor.

"I'm surprised that cotton was not more of a benefit to gross margin in the third quarter because the commodity price more than halved last year - the benefit should now be flowing through to H&M," Critchlow said.

The Swedish retailer sourced 75 per cent of products from Asia, where labour costs were rising, Critchlow said. Inditex sourced half its merchandise from "proximity countries", mainly Spain and Portugal; and 15 per cent from Turkey, she said. H&M said it expected the impact of sourcing and currency shifts to be "neutral" in the fourth quarter.

H&M's plan to introduce online sales in the US would be delayed until summer next year after adapting to the market there took longer than expected, chief executive Karl-Johan Persson said.

This article appeared in the South China Morning Post print edition as: H&M trails Zara's Inditex in fast-fashion retail stakes