H&M Earnings Drop More Than Expected in Second Quarter

Adam Jeffery | CNBC

H&M, the world's second-largest fashion retailer, posted a bigger than expected drop in second-quarter earnings, hit by still sluggish consumer morale and bad weather in its main European market.

The Swedish company said it was entering the third quarter with higher inventories than planned and the situation remained challenging in many of its major markets, but sales had got off to a good start in June.

Pretax profit in the March-May period fell to 6.1 billion crowns ($946.7 million) from a year-earlier 7.05 billion, compared with a mean forecast in a Reuters poll of analysts for 6.3 billion.

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H&M said profits were also negatively affected again by large long-term investments and currency translation effects.

Fashion firms have seen Europe's debt crisis and rising unemployment weaken consumer demand in the region, and H&M has faced growing competition in its budget segment.

Global leader Inditex, parent of the Zara chain, has weathered the European downturn better than H&M, helped by faster emerging market growth, but last week posted weak quarterly profit growth due to the cold weather and gloom in its home market Spain.

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With unusually chilly weather in March and April in Europe leaving spring collections on the racks, H&M said markdowns dragged down its gross margin in the quarter to 61.1 percent from 61.7 percent a year earlier, in line with expectations.

H&M, which had earlier said quarterly sales stood at 31.6 billion crowns, roughly unchanged from a year ago, said sales in June 1 to 17 were however up by 14 percent in local currencies. ($1 = 6.4748 Swedish crowns)