Sweden's H&M blames high costs for Q2 profit fall

AP News
Posted: Jun 22, 2011 3:23 AM

Swedish fashion retailer Hennes & Mauritz AB on Wednesday blamed higher procurement costs as well as campaigns and special offers for an 18 percent drop in second-quarter profits.

The Stockholm-headquartered retailer said Wednesday that net profit in the three-month period fell to 4.3 billion kronor ($673 million) from 5.2 billion kronor in the same quarter a year ago.

Sales in the quarter rose to 32.4 billion kronor from 31.6 billion kronor however, while gross margin shrank to 61.7 percent from a previous 65.9 percent.

"Increasing interest rates, higher energy prices and austerity measures in many economies have decreased consumer spending power," the company said. "This has led to many price campaigns and special offers in the fashion retail industry during the spring."

Purchasing costs were also higher than usual in the quarter, it said. This was mainly attributed to currency effects related to the strong krona and the weak U.S. dollar, cost inflation in the sourcing markets as well as lower spare capacity with suppliers.

"H&M chose not to pass on the increased purchasing costs to the customers," it said, adding it had instead profited from increased market share as it strengthened its pricing position.

A one-off cost of 248 million kronor for its staff incentive program also affected bottom-line figures.

CEO Karl-Johan Persson said that despite the challenges faced in the sales and sourcing markets, his company sees "great potential for future growth in existing as well as in new markets."

The company is planning 178 new stores in the second half of this year, with China, Britain and the U.S set to be the main expansion locations. Nineteen shops will be closed in the same period.

"Our business concept works well in all our markets as seen for example in recently added and fast growing markets such as China where we expand more rapidly," Persson said.