Weak Start to Fall Season Weighs on H&M - TheStreet

H&M (HNNMY) reported a fiscal third-quarter performance that was broadly in line with analysts' expectations on Friday but warned of a slow start to the autumn season after unseasonably hot weather hampered the group.

And margins for the full-year look set to slip at the Swedish fashion house, based on the retailer's nine-month turnout.

"Sales were good in most of the markets up until mid-August. Thereafter sales were negatively affected by unseasonably hot weather which continued into September, resulting in a challenging start to the autumn season," said CEO Karl-Johan Persson.

The stock fell by more than 2.5% during early European trading, to Skr242.90 ($28.24), its lowest level since July, before recovering to trade marginally higher.

Third-quarter sales were 8% higher than in the same period the year before in local currencies and 6.5% higher, at just under Skr49 billion, after foreign exchange effects. Prextax profit of Skr6.3 billion was marginally ahead of the consensus for just over Skr6.2 billion.

Slower sales growth of 1% during September, making for a weather-induced weak start to the fourth quarter, is likely to mean increased discounting in the final quarter of the year, according to the company.

"Poor current trading is likely to dominate sentiment in the short term," noted Tom Gadsby, an analyst at London-based broker Liberum Capital on Friday.

Although H&M does not provide same-store sales figures, Gadsby estimates that recent store expansion and only 1% sales growth in September probably means that same-store sales have fallen at a mid-to-high single digit rate so far in the fourth quarter, which began in September.

Gross margins were lower by 190 basis points, at 54%, in the third quarter, due to foreign exchange pressures. The operating margin was also down, by 210 basis points, at 12.8%.

For the nine months ending Aug. 31 the gross margin fell by 210 basis points to 54.6% while the operating margin fell by 320 basis points to 11.8%.

Sales at H&M have grown solidly over the last four years, rising from  just under Skr110 billion at the end of 2011, to Skr180.9 billion in 2015. However, the operating margin has fallen steadily over this period from 18.5% to 14.9% as of the end of 2015 due to pressures from increased competition and rising investment in expansion.

The Liberum team has suggested that recent operating margin pressures are probably the result of increased discounting, partly due to unseasonal weather and partly due to higher costs.

But H&M has also been cutting prices aggressively in recent quarters to compete with mercenary pricing from Inditex's Zara brand, which is the Swedish firm's No. 1 rival.

Inditex reported same-store sales growth of 11% for the first half, on Sept. 21, while net sales at the Zara brand increased by 13% to €6.9 billion ($7.7 billion). Contrary to the message coming from H&M, it also said that growth remained strong throughout August and September, with local currency sales advancing by 13%.

Liberum Capital currently has a hold rating on H&M stock and a price target of Skr275, which implies upside of just more than 10%.