H&M Q1 seen shining as shoppers resume spending

STOCKHOLM Swedish fashion chain Hennes & Mauritz (HMb.ST) is seen posting a jump in first-quarter profits amid signs that shoppers are returning to the stores after a tough year for the whole industry.

The world's third-largest clothing retailer has fared better than many others during the downturn, thanks to its geographic spread and focus on high fashion at bargain prices.

Though consumer caution in the prior 2008/2009 fiscal year led to the biggest yearly sales decline on record for H&M of 5 percent, growth signs have returned in recent months.

December sales rose for the first time since April and the trend continued in January.

"We see this recovery trend as likely to continue in 2010, with a pick-up in footfall and same-store sales over the year," Alessandra Coppola, an analyst at S&P Equity Research wrote in a research note on April 1.

Shares in H&M, the fourth best performer in the STOXX Europe 600 Retail .SXRP, have risen 20 percent since the start of the year, versus a 9 percent rise in the wider index.

In contrast, shares in British retailer Marks & Spencer, (MKS.L) which will give a trading update on the same day as the H&M report, have fallen by 7.5 percent.

Soren Lontoft Hansen, an analyst at Sydbank, said he expected H&M to report a "modest" rise in same-store sales for the quarter. "It seems like consumers are cautiously coming back to the stores," he said.

Pretax profit for the December-February period was forecast up 29 percent to 4.58 billion Swedish crowns ($637 million), according to a Reuters poll of 20 analysts.

One analyst, however, pointed out that H&M faces a favorable comparison with the year-ago period, which was its worst quarter in eight years.

GROSS MARGIN SET TO RISE AGAIN?

Analysts said positive same-store sales and a strong gross margin would drive earnings in the first quarter, following a stronger-than-expected fourth quarter result that lifted H&M shares as much as 9 percent on the day.

"I think we will see a similar margin increase in the first quarter, of around 4 percentage points," said Hansen.

"In Q1 last year, they were negatively affected by the exchange rates and the hedges. There will be a positive effect this quarter," he said, adding that spare capacity at suppliers, providing cheaper purchasing, would also provide a lift.

The gross margin -- a key measure of profitability -- was seen rising to 59.7 percent from 56.6 percent in the year-ago quarter, according to the Reuters poll of analysts.

Rival Inditex (ITX.MC), Europe's biggest clothing retailer and owner of fashion chain Zara, last month posted strong sales growth as its fast-to-market business model allowed it to respond quickly to an uptick in demand.

($1=7.190 Swedish Crown)

(Editing by Elaine Hardcastle)