H&M hit by tough conditions on high street as profits fall

The Swedish chain, which has 2,297 stores worldwide including more than 180 in the UK, reported a 23 per cent drop in pre-tax profits in the six months to May 31 to 9.3 billion Swedish krona (£900m).

The company, which operates in 39 countries, said its gross margin had dropped to 59.9 per cent in the period, from 64 per cent a year earlier, as the high cotton price and soaring fuel costs squeezed its profitability.

H&M is the latest retailer to report challenging conditions as the rising cost of living and muted wage growth, as well as the tough economic climate, stifles household spending.

H&M is particularly vulnerable to rising costs as its strategy focuses on offering fashionable garments at low prices.

The company reported a slight increase in sales, excluding VAT, from 51.9 billion Swedish krona (£5.02bn) to 52.1 billion Swedish krona (£5.04bn).

Looking ahead, the group said it plans to open 178 stores in the second half of the year, after opening 102 in the first six months.

H&M opened its first stores in Romania and Croatia in the period and said it expected the UK, USA and China to be the largest expansion markets.

Chief executive Karl-Johan Persson said: “Increasing interest rates, higher energy prices and austerity measures in many economies have decreased consumer spending power. During the spring, the fashion retail industry has been characterised by many price campaigns and special offers.”

He added: “We are optimistic about the future for H&M despite challenging conditions both in the sales markets and in the sourcing markets.”

He declined to comment on pricing in quarters to come, and on input cost expectations, but said the capacity situation at suppliers in Asia has improved from last autumn.

Many analysts expect pressure from cotton prices and currency effects to ease later this year, and Mr Persson said the firm as usual plans for annual sales growth in comparable units in local currencies, after 2 per cent growth in the first half of the year.

Mr Persson, however, said that while most markets had seen larger markdowns overall than usual, H&M itself kept markdowns on the same level as last year.

Zara owner Inditex last week posted a rise in quarterly profit as expansion in emerging markets helped offset sluggish demand in struggling Spain.

World number three fashion retailer Gap slashed earnings forecasts last month, saying higher price tags would not offset costs.

Mr Persson said H&M’s strategy not to pass costs on to customers is “entirely the right” one in the long run.

“We probably see some of the strengthened customer offer in the turnover. But not everything will show here and now. I think how people see us compared with competitors is, to a large extent, a long-term strategy.”

The first H&M store in the UK opened in 1976, and was the group’s first outside Scandinavia.