H&M warns of larger markdowns, dollar pressure

Fashion retailer Hennes & Mauritz warned on Thursday that price reductions to shift stocks of winter wear after unusually warm weather and high purchasing costs due to a strong dollar would weigh on its first quarter.

The world's second-biggest fashion retailer, which long enjoyed a profitability edge over bigger rival Inditex by sourcing largely in low-cost Asia rather than in Europe, is now seeing that advantage eroded by the strong dollar, the currency in which most Asian factories are paid.

H&M's budget fashion also faces greater competition than Inditex's mid-market Zara from the rise of discounters like Primark.

Sweden's H&M said it expected sales in January, the second month of its fiscal first quarter, to increase 7 percent in local currencies from a year ago.

That would mark a slowdown from 9 percent growth in the September to November period - when sales were already dampened by the unseasonally mild weather in northern Europe.

British retailers Next and Marks & Spencer have also seen winter clothing sales hit by the mild weather. Spain's Inditex, however, saw sales rise 15 percent between Nov. 1 and Dec. 3 in local currencies as its fast fashion model of sourcing more goods in or close to Europe allowed it to better respond to the warmer weather.

H&M said discounts on winter stock would pull down its gross margin by 1 to 2 percentage points in the first quarter and that it expected the strong dollar would have the same impact on the period as in its fourth quarter, but then lessen.

H&M shares were down 3.8 percent by 0935 GMT, compared to a 0.7 percent weaker European retail sector .SXRP.

"These are disappointing results, as guidance for Q1 looks particularly weak," said Bernstein analyst Jamie Merriman.

H&M's business model has been less suited than Inditex's to the rise of ecommerce as it is harder to recoup delivery costs when the average selling price of garments is lower and its decentralized logistics make it harder to go online quickly.

It is now investing heavily in new higher-margin product lines like beauty, sportswear and home furnishings and said on Thursday that it planned to increase long-term investment in broadening its product range and ecommerce by another 600 million Swedish crowns ($70.4 mln) in the 2015/16 fiscal year.

It maintained a target to increase the number of stores by 10-15 percent a year, reassuring some who had feared it could abandon the goal as more sales shift online.

It plans to open a net 425 new stores in the current year - mostly in China and the United States - a slightly slower growth rate than last year.

Inditex has also tempered its rapid pace of store openings. It plans to roll out ecommerce to all its 88 markets, saying its centralized logistics operation in Spain means it can deliver orders to customers anywhere within 48 hours.

H&M said it plans to launch ecommerce in another nine markets this year, meaning it will be online in 32 of the 61 countries where it is present.

Pretax profit in September through November fell to 7.15 billion crowns from a year-earlier 7.80 bln due to the strong dollar and mild weather, meeting average analyst forecasts.