The strong dollar is weighing on H&M’s profits. The Swedish fast-fashion giant – which sources about 80 percent of its products in Asia with the U.S. dollar as a cost base, but is selling about 75 percent of its products in Europe – said net profits barely budged in the third quarter, inching up 0.2 percent to 5.3 billion Swedish kronor, or $628.23 million.
Speaking during a conference call with investors on Thursday, Jyrki Tervonen, chief financial officer of Hennes & Mauritz AB, said those pressures are likely to continue.
“There are still a lot of purchases to be done for Q1 [of 2016]. If the currency rates are more or less at the same level, the impact in Q1 will be the same as in Q4,” said Tervonen, although he kept mum about the counter-measures the company intends to make, side-stepping investors’ questions.
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“Of course, we are looking into mitigating the effects, but how exactly we are going to do this, we prefer to keep to ourselves for competitive reasons,” the cfo explained, listing solely the change of sourcing markets as a possibility.
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Tervonen said third-quarter sales were also impacted by exceptionally hot temperatures in many of the retailer’s large European markets, though he insisted that the weather did not lead to an excess of stock.
“We have more fresh garments in stores than compared to the same period last year… But we are not afraid of markdowns. We look at the stock level and composition and it’s good. And we still have two months to go,” he noted.
Net sales amounted to 46 billion kronor, or $5.45 billion, during the quarter, up 19 percent excluding VAT, as reported. In local currencies, the increase was 11 percent.
Although sales have since picked up, rising by 12 percent in local currencies between Sept. 1 and Sept. 22, H&M is still struggling to catch up with its rival Inditex SA, which is buying more of its clothing in euros.
Bernstein analysts estimate that H&M’s sourcing issues will cause significant margin headwinds over the next 12 months.
“Longer term, we believe H&M is faced with higher input costs from wage inflation in Asia and increasingly competitive markets in many of their core countries, which we expect to lead to margin deterioration as the increased proliferation of value apparel retailers results in pricing pressure,” they explained.
The gross margin, a key indicator of profitability, fell to 55.9 percent in the third quarter from 58.3 percent a year earlier.
To get out of the ditch, the fast-fashion retailer said it was looking into new categories and more store openings as a key strategy. The new H&M Beauty line, launched in July, had “a very good start,” according to Tervonen. Available in around 700 stores in 28 countries, it will be rolled out to an additional 14 markets this fall.
Planning to open a net total of 400 stores by year-end, the company is slated to enter two new markets: India next week and South Africa in October. Next year, H&M also wants to launch its first stores in New Zealand, Cyprus and Puerto Rico.
The firm’s aggressive expansion plans continue online.
“We will open our H&M online store in both Switzerland and Russia [where third-quarter-sales were up 56 percent in local currency] during this autumn, giving us 23 H&M online markets at the end of the financial year. In 2016, we plan to offer e-commerce in a further nine existing H&M markets. These countries will be Ireland, Japan, Greece, Croatia, Slovenia, Estonia, Latvia, Lithuania and Luxembourg,” Karl-Johan Persson, chief executive officer of H&M, revealed in a statement, adding that he is also looking into launching other new concepts and brands, which he is confident will make the firm stronger. But he said, “We will come back to this at a later date.”