H&M Second-Quarter Profit Beats Expectations

STOCKHOLM, Sweden — Fashion firm H&M posted higher quarterly pretax profit than expected on Thursday, helped by store expansion and cost control but said many major markets remained challenging.

H&M, the world's second-biggest fashion retailer after Zara owner Inditex, said profit in the March-May period grew 10 percent from a year earlier, to 7.71 billion Swedish crowns (£696 million), against a mean forecast in a Reuters poll of analysts of less than 2 percent growth.

After decades of strong growth, H&M has repeatedly missed sales forecasts over the past year while earnings have come under pressure from heavy investment and stiffer competition from budget rivals and new online players.

H&M said higher inventories going into the second quarter as well as lower sales than expected led to increased markdowns on garments in the quarter.

"Sales in the UK, Scandinavia and Eastern Europe as well as in many of our growth markets were good. However, it was more challenging in several of our major markets such as the US, China, the Netherlands and Switzerland," CEO Karl-Johan Persson said.

H&M's shares, which have fallen sharply this year, rose 5 percent in early trading.

The company said higher inventories at the end of the second quarter would lead to more markdowns in the third quarter.

H&M predicted local-currency sales in June, the first month of its fiscal third quarter, to increase by 7 percent year-on-year, against a mean forecast of 8 percent.

"H&M has been investing heavily in online capability (IT, logistics, integration with the stores) for a some time now, but sales growth has yet to respond to this," Societe Generale analyst Anne Critchlow said.

"June trading still looks quite weak as 7 percent total same-currency sales growth implies flat like-for-like sales. Like-for-like have been flat or down all year so far," she said.

By Anna Ringstrom and Helena Soderpalm; editor: Keith Weir.