(Adds analyst comment, background)
By Anna Ringstrom
STOCKHOLM, Sept 30 Budget fashion retailer
Hennes & Mauritz was upbeat about prospects for
profitability next year but a fall in third-quarter earnings and
weak September sales sent the retailer's shares to a three-month
low on Friday.
H&M's results contrast with Zara owner Inditex
which has consistently performed more strongly than its smaller
Swedish rival. Inditex has been able to outperform H&M in part
because it can react more quickly to shifts in customer demand,
making it less exposed to unexpected weather patterns.
The unusually warm weather in August and September this year
hit demand for fashion in many of H&M's key markets, including
Germany, its biggest.
H&M said the unexpectedly weak summer demand had left it
with higher inventories than expected at the beginning of
September and there was a risk of increased markdowns in the
In September, the first month of its fourth quarter,
local-currency sales were up around 1 percent, the slowest pace
in a year, it said.
Some analysts are increasingly concerned that the group's
sluggish sales growth over the past few years is down to more
fundamental structural issues such as increased competition.
"For H&M, our key concern revolves around potential for long
term margin compression given the competitive environment, and
the risk posed by store sales cannibalisation as the company
maintains high levels of store expansion amidst a secular shift
to e-commerce," Bernstein analyst Jamie Merriman said.
The company's shares were down 3 percent at 1245 GMT, taking
a year-to-date fall to 20 percent.
H&M based its more optimistic outlook partly on plans for
its hefty investment in IT to start to slow next year, while
improved integration between online and stores would also
contribute to the turnaround.
"All this ... gives us a positive view of our opportunities
for 2017 and going forward, both in terms of sales and
profitability," Chief Executive Karl-Johan Persson said.
In H&M's fiscal third quarter ended Aug. 31, pretax profit
fell 10 percent to 6.3 billion crowns ($735 million), hit by
currency effects, markdowns after the warm weather, and higher
long-term investment spending. The fall roughly matched
The retailer's margins have long been under pressure from a
strong U.S. dollar which has kept costs high - H&M pays for its
clothing mainly in Asia in dollars and makes the bulk of its
sales in euros. It has also had to spend heavily on e-commerce
and new concepts to keep pace with new consumer patterns and
It stood by plans to launch two new separate concepts next
year. This will give it nine separate brands, including COS and
& Other Stories which opened in 2007 and 2013 respectively.
($1 = 8.5766 Swedish crowns)
(Reporting by Anna Ringstrom; Editing by Greg Mahlich and Jane