H&M Plans Further Expansion Despite Sales Slump

Fashion retailer Hennes & Mauritz (H&M) will expand its successful and potentially global clothing empire before the end of the year despite slowing sales in Germany, the Swedish firm’s main market.

The company, which is often called the Ikea of the fashion world for its smart designs and low prices, seems unperturbed by the fact that the state of the German economy has made a negative impression in its third quarter figures and has announced that the majority of the 51 new stores it plans to open in the fourth quarter of the year will be in Germany.

H&M announced its plan to expand further at a time when the global economic slowdown has forced many other retailers into retreat. In the first nine months of its fiscal year, the company opened 63 new stores and closed six in the first, giving it a total of 901. The new stores planned for the end of the year, which will also include an added push into the United States clothing market, will easily offset the closure of five others which will cease trading before the company issues its full year results.

Italian flagship store opens

The company, one of the world's biggest high-street clothing stores by market value, added in its statement that it intended to continue its expansion plans at the same rate well into the next year. H&M opened its first Italian store in central Milan in September with a view to opening additional stores during 2004. The Italian store brings the company’s European reach to 16 countries, including stores in Eastern Europe located in the Czech Republic and Poland.

To enlarge its reach in Germany at this time is seen by many analysts as a brave move by H&M despite the huge popularity of the chain among Germans. Sales in Germany bring in nearly a third of the company’s turnover but the current recession and rate of unemployment in the country has made the usually enthusiastic German shoppers more cautious.

Good and bad weather to blame

H&M’s results for the third quarter reflect consumer concern in Germany to a certain extent but the firm was quick to blame the majority of the slowdown in sales on the unusually cold weather at the start of the year and then the exceptionally hot weather across Europe for the slower sales. "Sales in the third quarter have been weak, mainly due to the unusually warm weather in Central Europe. Sales in August have been characterized by large fluctuations," H&M CEO Rolf Eriksen said at the company's press conference on Thursday.

The reported figures showed that sales fell in the first nine months of H&M’s fiscal year and that turnover grew a mere five percent in August, falling short of analysts expectations. The company reported a June-August pre-tax profit of 2.08 billion crowns (€200 million), up 9 percent year-on-year compared to forecasts of 2.15 billion crowns. However, sales for the third quarter were up 4 percent year-on-year to 13.21 billion crowns, slightly above a consensus of 11.54 billion.

Shares inch up regardless

A third-quarter gross profit margin of 55.6 percent beat expectations, up from 54.0 percent a year before, and a 17.7 percent operating margin was the best ever for that period. The news helped H&M shares gain slightly as analysts pointed out that company’s profitability remained strong. "They seem to have good control of the gross margin and of costs. The big question is whether the sales decline is temporary," said one analyst.