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Is Fast Fashion Losing its Grip? H&M Q2 Profit Down Amid Higher Markdowns

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H&M store exterior

Even H&M has been hurt by the strong dollar and cold spring weather.

The fast-fashion giant said Wednesday that profit fell 17 percent in the second quarter ended May 31 from 6.5 billion Swedish krona (about $788 million) in the year-ago period to 5.4 million billion Swedish krona ($655 million), as markdowns in relation to sales increased by 0.9 percentage points compared to the corresponding quarter in 2015.

The retailer blamed this discounting on the fact that spring merchandise didn’t sell as planned due to “unfavorable weather in many of the group’s important sales markets, particularly during March and April.”

By comparison, rival retail empire Inditex posted a 6 percent increase in profits in the quarter ended Apr. 30.

While H&M’s sales including VAT and converted into Swedish krona increased by 2 percent to 54.3 billion Swedish krona ($6.59 billion), several markets reported a decline, including: the UK, Switzerland, France, Portugal and China. Sales in Germany, H&M’s largest market with 450 stores, were unchanged from the same period a year ago (despite the opening of six new locations), and growth in the U.S. was relatively flat at 1 percent.

“Profits in the second quarter have been affected by a continued negative U.S. dollar effect, but also by increased markdowns and the costs of our long-term investments. The fact that the sales increase in the quarter was below plan naturally also had an impact on profits,” Karl-John Persson, chief executive officer, said in a statement, calling the first half of the year “challenging.”

During the quarter, H&M launched e-commerce in nine markets, including Ireland, Japan and Greece, meaning the company now has an online presence in 32 countries. Meanwhile, its brick-and-mortar stores now number more than 4,000 in a total of 62 markets.

“We are signing very favorable store leases and this year we plan a net addition of approximately 425 stores,” Persson continued, noting that most of the expansion will be in existing markets, chiefly China and the U.S. “New markets this year are Puerto Rico, where we had a successful opening in San Juan in June, and also New Zealand and Cyprus, where we will open in the autumn. Next year we plan to open four or five new H&M markets, of which Columbia will be one.”

The retailer said that group sales including VAT so far in June have increased 7 percent in local currencies, compared to the same period last year. Further, if today’s exchange rates remain, H&M said the stronger dollar could have a neutral effect on purchasing costs for the fourth quarter.

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