* Q2 pretax profit 5.78 bln crowns, above forecasts
* May sales flat, hit by calendar effects, strong comps
* Says currency hedging effects on gross margin to decrease
* Shares gain nearly 1 percent, outperforming sector
(Adds more analyst comment, detail, background, updates shares)
By Veronica Ek
STOCKHOLM, June 25 Hennes & Mauritz (H&M)
(HMb.ST), the world's third-biggest clothing retailer, beat
second-quarter profit forecasts on Thursday and said currency
swings were becoming less costly, pushing its shares higher.
The stock rose 0.9 percent to 374 Swedish crowns by 0925
GMT, outperforming a 0.5 percent fall on the DJ Stoxx European
retail index .SXRP, even though the Swedish group delivered a
lower-than-expected sales performance for May.
Sales in May, the final month of the second quarter, were
unchanged from a year earlier against analysts' average forecast
for a 1.4 percent rise, while turnover at stores open at least a
year fell 9 percent versus a forecast drop of 8.5 percent.
H&M, which has over 1,800 shops in more than 30 countries,
said calendar effects knocked 4-5 percentage points off May
sales and the performance should be seen in the context of a 25
percent surge in sales in the same month last year.
"Let's call it a very solid report from H&M today where a
lot of focus was on the gross margin," said Soren Lontoft
Hansen, an analyst at Sydbank.
H&M said its gross margin -- a key measure of profitability
-- came in at 61.0 percent, beating analysts' forecast of 60.2.
Second-quarter price markdowns were the same as a year
earlier, and currency hedges continued to put downwards pressure
on the gross margin, it said.
But those effects were less damaging than in the first
quarter and were expected to decrease further in the current
quarter, it added.
Europe's retailers are struggling with the worst economic
downturn since the Second World War, though there have been some
signs recently that consumer sentiment is starting to improve.
Euro zone retail sales edged up in April from March, their
first monthly increase in five months, while consumer confidence
is rising in H&M's home market of Sweden and also its biggest
market, Germany. [ID:nL41006596] [ID:nLM625007] [ID:nLP150930]
A recovery is far from assured, however. DSG International
DSGI.L, Europe's second-biggest electricals retailer, said on
Thursday it expected trading to stay tough. [ID:nLM41774]
WEATHERING THE STORM
H&M, which last week signed up luxury shoe maker Jimmy Choo
Ltd as the latest in a string of high-profile guest designers,
said pretax profit rose 6.4 percent to 5.78 billion crowns ($735
million) in the quarter ended May 31, topping the average
forecast of 5.67 billion crowns in a Reuters poll.
Sales, including VAT, rose 8 percent in local currencies to
31.07 billion crowns, with same-store sales down 2 percent.
Earlier this month Inditex (ITX.MC), Europe's biggest
clothing retailer, reported an 8 percent rise in sales at
constant currencies for the three months to April 30, as well as
a 9 percent increase for the period from May 1 to June 7.
Both H&M and Inditex have weathered the economic downturn
better than mid-market rivals such as Britain's Marks & Spencer
(MKS.L) and Next (NXT.L), helped by their focus on low-cost,
fast-moving fashions, as well as the geographic spread.
Citi analysts said H&M shares are trading on their lowest
ever price-to-earnings ratio relative to UK retailers.
"Given its structural, international growth potential, and
high cash generation, in contrast to the largely mature ... UK
peers, we argue for a buy rating (on H&M shares)," they said.
JP Morgan analysts, however, were concerned by a rise in
H&M's stock levels, which they said raised the risk of
H&M shares have outperformed the DJ Stoxx European retail
index by 3 percent this year. They trade at 19.5 times forecast
earnings, according to Reuters data, above Inditex on 18.3
times, partly due to the latter's greater exposure to an
extremely weak Spanish market.
($1=7.862 Swedish crowns)
(Additional reporting by Katarina Gustafsson in Sweden and Mark
Potter in London; Editing by Mike Nesbit and Rupert Winchester)