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H&M Sees 11-Year Low Margin on Higher Garment Costs

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H&M store exterior

The strengthening U.S. dollar has meant higher garment costs for Swedish retailer H&M—the company reported flat third quarter profit and its lowest margin since 2004.

H&M’s profit for the period was 5.31 billion Swedish kronor ($630 million), fairly flat to the prior period’s 5.3 billion kronor for the three months ended Aug. 31, the company reported in a statement Thursday.

“Profits have developed well during the first nine months of the year, although profits in the third quarter were negatively affected by increased purchasing costs due to the strong US dollar,” CEO Karl-Johan Persson said.

Sales in the period were up 19 percent to 46.02 billion kronor ($5.47 billion) despite unseasonably warm weather and Persson said sales took off again in September when the weather normalized and things are looking positive for fall.

Gross margin, however, was 55.9% down from 58.3% for the same period last year and the retailer’s smallest reported margin in 11 years.

The company blamed the strong U.S. dollar for the negative raw material prices, cost inflation, capacity at suppliers and transportation costs it experienced during the third quarter purchasing period.

“Since the U.S. dollar strengthened further during the purchasing period for the fourth quarter, the purchasing costs for the fourth quarter have continued to be negatively affected,” the company warned.

H&M gets roughly 80 percent of its products from Asia where deals are predominantly done in dollars, and according to Bloomberg, the dollar was on average 24 percent higher against the krona in the third quarter, a fact that also saw Primark take a hit.

Jamie Merriman, a Sanford C. Bernstein analyst told Bloomberg, “The company may be in for another tough six months.”

The company is forging ahead, however, rolling its online format out to Switzerland and Russia this fall, which will put its online market count at 23, and next year nine more markets (Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania and Luxembourg) will have the e-commerce option.

Physical store openings are also increasing. In the fourth quarter, H&M said it will open roughly 240 new stores, nearly three new stores a day. India and South Africa will get their first H&M stores this fall with locations in New Delhi and Cape Town, and next year, the company will enter an additional three new markets: New Zealand, Cyprus and Puerto Rico.

“As always, we are reviewing our customer offering in each market and we are monitoring the market closely to ensure that we offer the best combination of fashion, quality, price and sustainability,” Persson said.

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