H&M Bucks Retailers' Gloom as Profit Beats Estimates

STOCKHOLM, Sweden — Hennes & Mauritz AB provided some much-needed good news for Europe's struggling clothing retail market, reporting profit that topped estimates and setting a new annual growth target.

After missing estimates for five of the previous six quarters, H&M said fourth-quarter pretax earnings rose to 7.41 billion kronor ($839 million), exceeding the 7.04 billion-kronor average estimate. A previous target of increasing store numbers by 10 percent to 15 percent a year will instead become a sales target that includes both stores and online revenue.

The results provide a lift for Europe’s apparel retailers after a year when unseasonable weather patterns, changing consumer priorities and the strength of the dollar all provided challenges. H&M shares rose as much as 6.2 percent in early Stockholm trading, almost erasing their decline this year. Rival Inditex SA and UK clothing retailers Next Plc and Marks & Spencer Group Plc also gained.

H&M’s better-than-expected profit shows that pressures caused by the dollar’s strength and promotional activity are starting to ease, according to Berenberg analysts.

Margin Expansion

Fourth-quarter gross margins of 57 percent were down on last year’s 57.5 percent, though above the average estimate of 56.6 percent.

Looking ahead, the retailer said it expects a slightly negative effect on purchasing costs due to inflation and currencies in the first quarter. Profit this year is set to be helped by a gradual reduction in the pace of investment on new brands and online shopping.

H&M said it plans to add 430 stores this year, of which about 70 or 80 will be other brands than H&M, such as the COS, Monki and Weekday banners. The retailer will review its existing locations and plans to close some shops. H&M also said it plans to add one or two new brands this year.

H&M said it expects “continued high profitability” along with its sales growth target, which excludes currency swings.

The retailer also said it will add new online options such as next-day shipments that's currently offered in five markets and time-slot deliveries available in Japan. The move is an attempt to get products to customers faster, an area where H&M faces stiff competition from rivals like Zara, owned by Inditex.

By Anna Molin and Paul Jarvis; editors; Matthew Boyle and  Thomas Mulier.