Swedish retailer H&M's profit hit by expansion drive

Hennes & Mauritz posted an unexpected drop in quarterly earnings, hit by competition in tough European markets and the cost of its expansion drive.

Hennes & Mauritz (H&M), the world's second biggest fashion retailer, posted an unexpected drop in quarterly earnings, hit by competition in tough European markets and the cost of its expansion drive to take on bigger rival Inditex.

The Swedish group does the bulk of its business in Europe, where the region's debt crisis and rising unemployment have dampened consumer spending.

At the same time, it has been making long-term investments in online shopping and new chains of stores, such as the recently-launched "& Other Stories," in a bid to catch up with the broader offering of Spanish rival Inditex, which runs the Zara chain and a string of other brands.

"These long-term investments have created cost increases and to a great extent have not yet generated any revenue," chief executive Karl-Johan Persson said on Wednesday.

"However, we consider these investments to be both necessary and wise as they aim to secure future expansion and profits and thereby further strengthen H&M's position," he added.

Pretax earnings in the September-November period fell to 6.6 billion Swedish crowns from a year-earlier 6.8bn crowns, hit also by a strong crown. Analysts had on average forecast an unchanged profit.

H&M said a tough economic backdrop led to widespread price promotions and markdowns in the fashion industry, although its own level of markdowns in relation to sales was the same as in the fourth quarter of the year before.

Stocks were somewhat higher than planned at the end of the period, although the group said markdowns in the first quarter would also be around the same level as the year earlier.

Bernstein analysts said this would be a challenge, particularly given the likely disruption to sales from snow.

"These are disappointing results, as management continues to step up investment in both the product and longer term initiatives, yet sales performance has not rebounded," they said.

H&M predicted local-currency sales growth in January, the second month of its fiscal year, of 5 per cent, the weakest figure since October, due to cold weather.

H&M, present in 48 markets, said it would open a net 325 stores this year, with most planned in China and the United States. It would also launch online sales in the United States.

It saw expansion opportunities in big European markets like Russia, Germany, Britain, Italy, Poland and France as well.

* Reuters