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H&M Sales Up, Margins Down on Fast Fashion Competition

Hennes & Mauritz AB (H&M) the EU’s second largest clothing retailer, beat analysts’ estimates for April, posting its highest increase in sales since last November.

The retailer’s margins, however, narrowed as rivals in the fast fashion market turned up the competitive heat with discounted pricing. Leading the quest for value-conscious fashion buyers, and capturing more market share were Primark, Forever 21, and Inditex, which owns the Zara chain.

Growing online retailers such ASOS and others are also attracting previous brick-and-mortar customers with lower prices and convenience, further eroding H&M’s margins.

Another factor likely impacting H&M’s bottom line are rising wages for Bangladeshi garment workers. Bangladesh is the source of close to 80 percent of H&M apparel manufacturing.

Despite the price wars waged by its competitors, H&M’s April revenue, including value-added tax, spiked 17 percent year-over-year, according to a company statement.

The increase almost doubled the 10.1% rise that analysts surveyed by SME Direkt estimated. SME Direkt is an independent consensus estimate service, specializing in Nordic businesses.

Prior to the report on its sales upturn, H&M’s share price fell 7.4% as sales remained lackluster while the company laid out cash for foreign expansion, e-commerce initiatives and new merchandising methods. H&M also established its first retail outlet in the South America and launched a U.S. online sales operation.

Despite the recent bump in sales, gross margin shrinkage could result in a significant downside risk, said analysts of Exane BNP Paribas SA, a European research and investor services company.

H&M currently has 3,246 retail stores, a substantial increase from the 2,881 stores it operated in 2013.