H&M profit surprise lifts shares, store mix under review

STOCKHOLM (Reuters) - Fashion retailer H&M HMb.ST surprised investors on Tuesday with a small increase in quarterly profit and said it would review its mix of stores and brands, and invest more in e-commerce, lifting its shares to a one-month high.

FILE PHOTO - People walk past the windows of an H&M store in Barcelona, Spain, December 30, 2016. REUTERS/Regis Duvignau/File Photo

The world's No.2 apparel group after Zara owner Inditex ITX.MC said it would check it had the right number of stores and brands in each market and that around 70 to 80 new stores this year would be brands other than its low-cost H&M chain.

A faster expansion for the newer brands, such as the mid-market COS and & Other Stories, brings the group more in line with Inditex, whose diversification has helped it to outperform the Swedish group. Zara, the Spanish firm’s biggest chain, accounts for less than four in 10 of its stores.

H&M has branched into seven separate concepts in recent years to broaden its customer base in the face of tougher competition in the budget segment, and plans to launch one or two more this year, but around nine of 10 stores are still its main budget brand H&M.

“These concepts are strong and only at the beginning of their expansion journey,” Chief Executive Karl-Johan Persson said. “They will account for a new wave of growth.”

H&M said it would open around a net 430 new stores this year, a 10 percent rise compared with 11 percent in the past year and more than some analysts expected.

Head of investor relations Nils Vinge said the store portfolio review would probably mean a larger number of gross store closures and gross new openings than last year.

Inditex also has a business model that often enables it to respond more quickly than H&M to changes in demand. H&M said it was investing in analytics and the automation of distribution centres to speed up its own supply chain.

“With e-commerce and omnichannel the market is quickly becoming increasingly complex, which means new demands for speed and flexibility,” Vinge said.

H&M said on Tuesday it would roll out e-commerce in six more markets this year, taking it online in 41 of 69 markets at year end. It is also replacing a decades-old store growth target with a turnover target to reflect growing e-commerce.

The company is now aiming for annual local-currency sales growth, including online sales, of 10-15 percent, and expects to be within that range from this year on. In the fiscal year 2015/16, local-currency sales were up 7 percent.

Analysts have criticised H&M for not offering services such as picking up items bought online in its stores and the company responded on Tuesday by saying it would test “click-and-collect” in Britain this year, was rolling out faster delivery options and online returns in stores in some markets.

The group, whose profits have fallen for five straight quarters, said its fiscal fourth-quarter pretax profit rose to 7.4 billion crowns ($839 million) from 7.2 billion in the same period a year earlier.

Analysts polled by Reuters had on average forecast a 2 percent drop to 7.0 billion.

At 1450 GMT, H&M shares were up 6.2 percent at 251.5 crowns.

H&M, which had previously reported a weaker than-expected turnover for the quarter, as well as for December, said sales from Jan. 1-29 were up 11 percent in local currencies.

It cautioned cost inflation and currency moves would have slightly negative effects this quarter on purchasing costs, and there would be more markdowns than a year ago due to the weaker-than-expected fourth-quarter sales.

Additional reporting by Helena Soderpalm; Editing by Alexander Smith and Mark Potter