H&M Q1 Profit Hit by Markdowns and Currency Effects

STOCKHOLM, Sweden — Hennes & Mauritz, the world's No. 2 clothes retailer, posted a 30 percent drop in first-quarter pretax profit on Wednesday due to markdowns and a stronger U.S. dollar, although the results were slightly better than expected.

Sweden-based H&M had warned in January that markdowns to shift winterwear after warm weather and high purchasing costs due to a strong dollar would weigh on its first quarter.

December-February pretax profit fell to 3.3 billion crowns ($406 million) from a year-earlier 4.7 billion, against a mean forecast of 3.2 billion in a Reuters poll of analysts.

The gross margin at H&M, which has already reported sales for the quarter, also shrank slightly less than expected, to 52.0 percent from 55.2 percent.

Societe Generale analyst Anne Critchlow said quarterly results were mixed while March sales were weak and indicate a 6 percent drop in comparable sales.

H&M shares, however, were up 2 percent in early trade.

"There is no real change to gross margin guidance with regard to dollar strength through the year, which may reassure the market," she added. "Gross margin may not rise year-on-year for the foreseeable future and we see EPS falling this year."

H&M, which long enjoyed a profitability edge over Inditex by sourcing mostly in low-cost Asia, now sees that advantage eroded by the strong dollar, in which most Asian factories are paid.

"The negative dollar effect continues for purchases made for the second quarter 2016, although the negative effect has begun to gradually decrease," H&M CEO Karl-Johan Persson said.

"Should today's exchange rates continue, the effect of the U.S. dollar on purchasing costs for the fourth quarter will be neutral or slightly positive compared to the corresponding quarter the previous year," he said.

By Anna Ringstrom; editor: Susan Fenton.