Swedish fashion chain H&M beats profit forecasts but trading remains tough

STOCKHOLM: Swedish fashion chain H&M beat quarterly profit forecasts on Thursday after improving its ability to control costs as it expands across the globe.

But the world's second biggest fashion retailer said many major markets remained challenging. Unexpectedly low sales and higher inventories meant it had to step up price markdowns on its clothes to get them sold.

After decades of strong growth, H&M has repeatedly missed sales forecasts because of stiffer competition from budget rivals such as Primark and new online players Zalando and Asos.

Its bigger rival, Zara owner Inditex, has weathered sluggish markets better. H&M said key markets such as China and the United States remained tough.

H&M's shares, which have been on a downhill slope since 2015, rose 2.6 percent by 0720 GMT on the profit beat, taking a year-to-date fall to 17 percent, but investor uncertainty about the company's sales outlook lingered. The shares later fell back to stand 0.9 percent higher by 0915 GMT.

"Whilst the outcome for the quarter is better than expected, there is plenty here for the bears too," said Morgan Stanley analysts, who have an "underweight" rating on H&M stock.

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H&M has in recent years made large IT investments to better integrate brick-and-mortar store and online shopping, and to speed up the supply chain to get new designs to consumers more rapidly.

Analysts complain, however, that they are still seeing little sign that the investments are paying off.

"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," said Societe Generale analyst Anne Critchlow, who rates H&M a "sell".

"For the H&M concept's young value fashion target audience, stronger investment may be required, for example through a free delivery and returns offer, in line with some of the pure online competitors."

Chief Executive Karl-Johan Persson told a news conference investment levels would remain high. The company warned of more markdowns in its third quarter, after inventories increased also the second quarter.

It also guided for local-currency sales growth in June, the first month of its third quarter, of 7 percent year-on-year, just below a mean forecast in a Reuters poll.

It had already reported second-quarter sales.

Critchlow said that implied flat like-for-like sales in June after they were flat or negative every month this year.

In order to reach more shoppers and to reduce exposure to the increasingly crowded budget segment, H&M is also branching out into new separate brands with a higher price range than its core budget H&M brand.

Pretax profit in the March-May period grew 10 percent from a year earlier, to 7.71 billion crowns ($904 million), against a mean forecast in a Reuters poll of analysts of less than 2 percent growth.

Inditex earlier this month reported an 18 percent rise in quarterly profit, stretchingh its lead over H&M, although its sales growth slowed in the weeks before the report.

H&M unveiled plans to enter Uruguay and Ukraine next year, and to roll out online in the Philippines and Cyprus this year and in India next year. The company, which doesn't report online sales separately, predicted annual online sales growth of least 25 percent going forward. - Reuters