H&M steps into 2011 hit by pricey cotton

H&M has not started the new year wrapped in cotton wool as its main raw material´s price has soared to hit record highs in recent months. The high street retailer has consequently reported a bigger-than-expected 30 per cent drop in net profits

in the first quarter.

"Instead of passing on these cost increases (for cotton) to customers, we chose to strengthen our price position in order to build further on our strong market position for the long term," Chief Executive Karl-Johan Persson said in a statement.

Shares in H&M have dropped by 14 per cent in the past six months, in response to the falling margins. Just after the bell rang on Thursday morning, the stock was down 4 per cent. “H&M is making a massive bet on market-share gains,” Simon Irwin, an analyst at Liberum Capital in London, said to Bloomberg by phone today. “They’re cutting prices in an environment where their costs are rising and competition is increasing.”

As the Swedish retailer published this morning, sales excluding VAT increased by 9 percent in local currencies. Converted into SEK, sales amounted to SEK 24,503 m (24,846), a decrease of 1 percent. “The difference between the sales development in local currencies and in SEK is due to a strong negative currency translation effect since the Swedish krona has strengthened
against most of the sales countries’ currencies”, further explained.

Sales in February 2011 increased by 9 percent in local currencies compared to the same month last year. Its global like-for-likes nudged ahead 1% over the 13 weeks to February 28.  The fashion retailer clocked up total global sales of £24.15bn. Gross profit amounted to SEK 14,174 m (15,390), corresponding to a gross margin of 57.8 percent (61.9). Sales in the period 1 – 29 March 2011 increased by 3 percent in local currencies compared to a very strong comparative period last year that benefited from, among other things a positive Easter effect.

Profit after financial items amounted to SEK 3,538 m (5,055). Group profit after tax was SEK 2,618 m (3,741), corresponding to SEK 1.58 (2.26) per share.

Persson summed the first months of the year as follows: ”We increased sales in local currencies by 9 percent and 1 percent in comparable units in a continued tough market. The quarter was also characterized by the fact that many external factors had a negative effect on the results, in contrast to last year when they had a favorable effect in the corresponding quarter. These external factors, which were beyond our influence, were for example strong negative currency effects and cost inflation in the sourcing markets with for example, significantly higher cotton prices.”