Swedish fast fashion retailer Hennes & Mauritz, the second largest clothing retailer in the world after Zara owner Inditex SA, reported record sales and earnings that beat expectations in the fiscal fourth quarter, but said it must keep up its heavy pace of investment in new products, market expansion and technology if it wants to stay competitive.
H&M’s pretax profit rose 7 percent to $953 million in the three months ended November, missing analysts’ average forecast of $973 million. Net income rose 13 percent to $760 million, slightly ahead of analyst forecasts of $756 million. Revenue rose 11 percent in local currency to $5.21 billion.
“While we are continuing our long-term investments, at the same time we can see our investments in areas such as online starting to bear fruit,” CEO Karl-Johan Persson told analysts today.
The Swedish company is investing heavily in new and higher-priced product lines in an effort to shore up margins eroded by the fierce competition from retailers like discount chain Primark and fast fashion players Forever 21 and Uniqlo.
It will continue the expansion into new products and markets in 2015, with another 400 new stores added to its current 3,511 and websites in nine new European markets. Though most of its new stores would be in China and the US, it would also open its first stores in Taiwan, Peru, Macau, South Africa and India.
It also intends to launch a new range of beauty products in the fall, to open homewear departments in about 100 stores, and to expand its upmarket brands like COS.
Though earnings beat expectations, Wall Street is not happy with the direction margins are travelling. “These are disappointing results, as margins continue to decline,” said Bernstein analyst Jamie Merriman, who rates the stock an “underperform.” “We expect continued margin compression.”
H&M said markdowns in the quarter were lower than in the prior year, but cost inflation was higher, a trend it expects will continue in the first quarter due to the strong dollar. H&M sources about 80 percent of its apparel product in dollars from Asian suppliers.
The retailer is predicting a 14 percent rise in sales for January after the 15 percent increase in December, the start of its first quarter.