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China’s Yuan Devaluation Could Help H&M Cut Manufacturing Costs

China’s yuan devaluation has certainly shaken up the world market and stirred concerns of further economic decline in the country, and though the lower-valued currency will change things for some retailers, it won’t affect companies—even those in the same sector—similarly at all.

In an article comparing the currency slide’s likely impact on Spain’s Inditex and Sweden’s H&M, The Wall Street Journal said though both companies have similar sales exposure to China and both have grown their presence there in recent years, the impact to each will vary significantly.

The yuan’s fall so far is not yet enough to provoke panic, but if the currency continues its downward trend, there could be cause for alarm. If retailers don’t cut prices, their products will suddenly be more expensive in the local currency and the lower value will mean more expensive travel, which may mean sales to Chinese tourists, a major market for European brands, could suffer, according to the Journal.

Swiss global financial services firm UBS estimates that H&M sources as much as 40 percent of its products from China, while that number is a lower 20 percent for Zara owner, Inditex.

“As the yuan was allowed to rise against the dollar in recent years, H&M’s cost of goods increased at a faster pace compared with its rival. Its gross margin has been steadily falling in the past five years, while Inditex’s has remained steady, helping to boost the latter’s stock,” the Journal reported.

Inditex’s stocks are up 26 percent this year, compared to just a 6 percent rise for H&M, but the Journal said those forces could be reversing.

According to the Journal, Espirito Santo Investment Bank estimates that for every 1 percent the yuan falls against the dollar, H&M’s gross margin and operating profit could see a 0.25 percentage point boost, and manufacturing costs might be lower as the weaker economy will mean less work for factories.

China’s recent devaluation could also cut retailer’s yuan-denominated cost of goods sold by as much as 5 percent, UBS told the Journal, and if companies can retain half of those savings, that amounts to about 1.2% of H&M’s pretax profits last year and 0.6% for Inditex.

“Inadvertently, the People’s Bank of China may have given H&M a little bonus compared with one of its main rivals,” the Journal reported.