UPDATE 2-H&M misses profit forecasts, delays U.S. online launch

Thu Sep 27, 2012 3:01pm IST

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* Pretax profit 4.90 bln SEK vs consensus 5.37 bln

* Gross margin 58.2 pct vs forecast 59.1 pct

* Shares down 5.2 pct

* Postpones U.S. online launch, confirms new store concept

By Veronica Ek and Rebecka Roos

STOCKHOLM, Sept 27 (Reuters) - The world's second-biggest clothing retailer Hennes & Mauritz missed profit forecasts on Thursday, as grim economic conditions and a heatwave kept shoppers away and expensive currency transactions hit margins in the third quarter.

H&M said it would postpone the launch of online services in the United States, the world's largest online market, until mid-2013. The group had previously planned the launch for this autumn. But it said it would press on with plans for a higher-priced alternative range in its shops.

Pretax earnings were 4.90 billion crowns ($740 million) in H&M's third quarter, which runs from June to August, compared with a year-ago 4.85 billion crowns and a mean forecast for 5.37 billion in a Reuters poll of analysts.

The group continued to gain market share, but gross margin fell to 58.2 percent, below the same quarter last year and shy of analysts' forecasts.

In Europe, where H&M has the largest part of its business, many retailers are struggling as consumers curb spending faced with rising unemployment and cuts in government support. This year unusually hot August weather made them even less inclined to spend on new lines of autumn wear.

For H&M those difficulties were exacerbated by expansion costs - it plans to open 300 new stores this year - and complicated currency swings. It makes most of its purchases in relatively strong U.S. dollars, sells mainly in weak euros, and then has to translate it all back into the Swedish crown, which has surged this year.

"We all knew that the strengthened dollar was bad for the sourcing in Asia and that inflation in Asia is bad for H&M's gross margin, but this hit harder than I expected," said Sydbank analyst Nicolaj Jeppesen.

Espirito Santo Investment Bank analyst Caroline Gulliver said: "The gross margin benefits H&M has achieved through the past decade, from shifting sourcing to lower cost countries, have now come to an end."

Total sales in the Sept. 1-25 period, the beginning of the group's fiscal fourth quarter, rose by 14 percent in local currencies.

H&M shares, which have gained some 7 percent this year, were down 5.2 percent at 0851 GMT, underperforming a 1.2 percent fall on the STOXX Europe 600 retail index.

NEW BRAND LAUNCH

However the retailer confirmed it would press ahead with the launch of a new concept, called "& Other stories", a higher priced range which targets women and will sell a broad selection of clothes, shoes and accessories.

The project is seen an effort to keep up with its largest rival Spain's Inditex, which runs the Zara chain and last week beat first-half profit forecasts. Inditex has more than twice the number of stores and has been successful at operating several different store concepts.

While many retailers have felt the pinch from the global economic downturn, H&M and Inditex have up to now fared better than most thanks to their focus on cheap fashion and a broad geographic presence that includes faster-growing emerging markets. H&M has more than 2,600 stores across 44 markets.

"Conditions in the fashion retail industry continued to be challenging in many markets - both as regards the weather and the macro-economic climate," H&M's CEO Karl-Johan Persson said, but added: "We see significant opportunities for continued growth both in stores and online."

Espirito Santo's Gulliver said: "H&M is still a good growth company, and on a normalised currency basis we expect sustainable profit growth of 11-12 percent driven by new store openings."

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