Strong dollar turns expensive for H&M over second quarter

Ever strong dollar is making things expensive for H&M, as the Swedish retailer warned earlier this week it expects the strong American currency to translate into rising sourcing costs throughout the year after it hurt second-quarter profits.

The world's second-biggest fashion retailer, said it suffered in the March-May quarter from higher input costs, largely due to the dollar. Hennes & Mauritz AB warned that the rising dollar will have a “very negative” effect on garment costs in the second half after the US currency burden profitability over the second quarter to its lowest level in nine years.

Bernadette Kissane, Apparel and Footwear Analyst at Euromonitor International explains that “Although the strong US dollar negatively impacted the overall performance of H&M, 21 percent increase in sales against a strong comparable last year is an impressive performance. Direct competitor Inditex reported an increase in sales of 28 percent in its latest quarter; however, with an in-house sourcing strategy the company has been relatively sheltered from the strengthened dollar. Despite the greater costs, the world’s second largest apparel retailer reassured shoppers saying that "it has the best customer offering in each individual market.”

Analysts following the company pointed out H&M is unlikely to pass on those costs by raising prices, even if the situation could be even worse for its third and fourth quarters.

It is noteworthy that Hennes &Mauritz buys the majority of its clothes in Asia yet on dollar contracts and sells most of them in Europe, being therefore highly exposed to whatever happens to the American currency.

“With high U.S. dollar sourcing exposure, and relatively short hedging, H&M have felt the headwind of U.S. dollar appreciation earlier than most,” said Simon Bowler, an analyst at Exane BNP Paribas. “This is likely to persist.”

Strong dollar dents H&M's profitability in H1

The dollar was 26 percent higher than the euro on average during the second quarter, compared with the year-earlier period, and 31 percent higher against the krona.

In this regard, H&M’s Chief Financial Officer Jyrki Tervonen told in a call for analysts that, other than the impact of the dollar, H&M input costs are broadly neutral, with cotton prices falling but salaries for factory workers on the rise.

Other front for concern came from its margins, as H&M's gross margin withdrew more than expected in the second quarter (- 1.4 percent on a year-on-year basis) and missed the average estimate of analysts polled by Reuters of 59.9 percent.

On the wake of the news, the company’s stock traded down, closing the week as the biggest loser in the European retail sector.

"The outlook for the next 12 months in relation to currency movements is far more favourable for Inditex than it is for H&M," said Societe Generale analyst Anne Critchlow, who has a ‘hold’ recommendation on the stock.

"We think Inditex will prove to be the much stronger story, for the remainder of this year, into next year and beyond, particularly with regard to margin outlook," she said.