* Investing heavily in online, new brands and products
* Blames gross margin fall on foreign exchange rates
* CEO sees developing markets as "great opportunity"
* Plans 375 new stores and online expansion in 2014
* Dividend held at 9.50 Swedish crowns
By Mia Shanley and Emma Thomasson
STOCKHOLM, Jan 30 Hennes & Mauritz's
rapid expansion will continue apace, the world's second-biggest
fashion retailer said on Thursday after reporting that heavy
investment in its online offering and new brands depressed
H&M's gross margin, which showed its first quarterly rise in
three years in the third quarter, slipped more than expected to
60.8 percent from 61.6 percent.
Though the company attributed much of the margin fall to
foreign exchange rates, Chief Executive Karl-Johan Persson said
that a sell-off in emerging market currencies would not deter
H&M from investing in the likes of China, where it plans to open
80-90 new stores this year among 375 planned worldwide.
"We always live with a bit of a currency risk," Persson told
Reuters. "We are entering more developing countries and we see
great opportunity to grow there."
The margins also highlight the challenges H&M faces in its
efforts to improve working conditions at suppliers in low-cost
production centres such as Bangladesh and China, though the
company insisting that an ethical approach and a budget-fashion
business model are compatible.
The Swedish retailer has almost tripled store numbers over
the past decade to 3,132 outlets in 53 countries, but most of
its sales still come in Europe, where it was harder hit by the
economic downturn than bigger rival Inditex.
Emerging markets account for a bigger slice of sales at
Inditex, the Spanish owner of the Zara retail chain, than they
do at H&M.
H&M's shares were down 3.2 percent by 1325 GMT, compared
with a 1 percent weaker European retail index and a 0.7
percent fall for Inditex, taking them almost back to where they
were trading after reporting a margin improvement in September.
Analysts said investors were reacting to the gross margin
figure even though they were encouraged by the news that sales
growth accelerated to 15 percent in January from 10 percent in
December, the first month of H&M's financial year.
"Given their optimistic outlook for 2014, the four new
online launches that should boost sales this year and strong
trading in January, I would expect that shares could recover,"
Barclays analyst Chris Chaviaras said.
The company said it will launch an online store in France in
spring or summer, with three more large markets to follow before
the end of 2014, taking the total to 13.
H&M has also come up against margin-eroding price
competition from discount brands such as Britain's Primark
and Forever 21.
In response, it has invested in two growing mid-market
brands - & Other Stories and COS - and is introducing more
premium products. It will open its first U.S. branch of COS in
New York this year and has also launched a new sportswear
ROOM FOR GROWTH
H&M plans to enter Australia, the Philippines and a couple
of other new markets in 2014, but Persson still sees plenty of
room to grow in countries where it is well established,
including its top three markets of Germany, the United States
Persson said the launch of U.S. online sales in August had
been well received and it will further raise its U.S. profile
with a TV advertisement featuring former England soccer star
David Beckham during the Super Bowl.
Fearing that online operations could cannibalise more
profitable store sales, high street fashion chains have been
slow to embrace e-commerce, though Inditex has entered more
markets than H&M and is considered more likely to benefit
because of higher-margin garments and centralised logistics.
"We have a good profitability online," H&M's Persson said,
though he declined to give online sales figures, saying that the
business is becoming increasingly integrated.
"We believe a lot in our online business. The plan is to
Quarterly pre-tax profit rose 11 percent to 7.3 billion
Swedish crowns ($1.13 billion), missing average analyst
forecasts for 7.6 billion crowns, while the dividend was held
steady at 9.50 crowns per share.
H&M said that an unseasonably warm autumn in Europe led to
more discounting than a year ago and it predicted markdowns in
the first quarter at the same level as in 2013.