Jan 22, 2010
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H&M fourth quarter seen lower but brighter times ahead

Jan 22, 2010

By Veronica Ek

STOCKHOLM (Reuters) - Swedish fashion chain Hennes & Mauritz (HMb.ST) is seen posting lower fourth-quarter earnings next week as shoppers tighten their belts to cope with the downturn, but analyst said prospects for 2010 looked bright.

Photo : AFP

The world's third-biggest clothing retailer has fared better than many others in the weaker global economy, thanks to its geographic spread and focus on high fashion at knock-down prices.

Still, H&M sales have been hit hard by consumers holding back their spending, and sales at established stores fell as much as 5 percent in the fiscal year of 2008/2009. That was the biggest yearly decline on available record.

While the sales performance for the quarter is already known, analysts said they would focus on the gross margin -- a key measure of profitability -- and any comments the company might give on the outlook for the new fiscal year.

One analyst said markdowns and higher purchasing costs due to a previously strong dollar would weigh on the margin, but that some hedging effects, which earlier hurt the margin, would lift it.

The mean forecast for the gross margin was 62.8 percent, up from 62.4 percent in the corresponding quarter a year earlier and from 61.6 percent in the third quarter, according to a Reuters poll.

"I think that's too optimistic. It has been a very difficult autumn with the weather, the economy, with H&M apparently underperforming the market. It doesn't look very good," said Frans Hoyer, an analyst at Proactive Independent Ideas.

H&M's pretax profit for the September-November period was forecast down 2 percent to 6.97 billion Swedish crowns (597.4 million pounds).


In September, October and November, H&M sales widely undershot market forecasts, but analysts expect sales to pick up in December, the first month in the fiscal first quarter.

"We expect H&M's recent weak like-for-like sales trend to improve this year with a better macro environment and as new collections enter stores," Nordea analyst Stellan Hellstrom wrote in a research note.

"The exact timing is difficult to predict, but we believe Q4 could be the turning point and forecast some stabilisation in H1 2009/10."

H&M has said total sales in the key Christmas month increased around 11 percent during the first two weeks of December. The mean forecast in Reuters' poll was for total sales to rise 9.4 percent in the month, while sales in stores open for more than a year were seen dropping 1.1 percent.

Arch rival Inditex (ITX.MC), Europe's biggest clothing retailer and owner of fashion chain Zara, last month reported a higher-than-expected nine-month profit and said sales had picked up heading into the Christmas period.

H&M usually reveals new expansion plans at the end of the year. For the past few years, the firm has increased the number of stores by 10 to 15 percent per year, making it one of the most rapidly growing European clothing retailers. But it may not keep up the same pace in the coming year, Hoyer said.

"The sales performance in the autumn may actually have shaken them a little bit ... I wouldn't rule out some type of slowdown of store openings in 2010, although they have the financial strength to carry on."

(Editing by Toby Chopra)

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