H&M Pretax Profit, May Sales Rise; Weather Helps

Hennes & Mauritz posted second-quarter pretax profit that beat forecasts and sent its shares higher, as a sunny May helped boost sales and a weak dollar lowered purchasing costs.

Oliver Quillia for cnbc.com

The world's third-biggest clothing retailer by turnover made a pretax profit of 5.43 billion Swedish crowns ($901 million), compared with an average forecast of 5.25 billion in a Reuters poll of analysts and 5.13 billion in the same period in 2007.

The company's gross margin was 62.9 percent, above analysts' forecast of 61.6 percent.

"It is difficult to find anything negative in this," said Mats Hyttinge, analyst at Glitnir.

Shares in H&M, which will launch a collaboration with Comme des Garcons' founder Rei Kawakubo in the autumn, were up 5.8 percent.

The company said the gross margin benefited from lower buying costs due to a weaker U.S. dollar, partly offset by slightly higher price reductions and increased transport costs.

Discounting knocked the gross margin down by 0.4-0.5 percentage points, Nils Vinge, Head of Investor Relations at H&M said.

Second quarter sales were 21.6 billion crowns, in line with the mean forecast in the poll, saved by warm weather in May after unseasonably cold weather in April.

Sales in May were up 25 percent against an expected 20.2 percent.

Turnover in stores open a year or more were up 14 percent.

Analysts had forecast rises of 20.2 and 9.2 percent.

"It is impressively good, even if expectations had been quite low before the report," Hyttinge said.

"May sales were good and what is most interesting is that the gross margin continues to be strong, which points to the fact that discounts (on clothing) weren't huge."

Chilly April

A global slowdown has led to worries clothing retailers would suffer as shoppers switched from buying to saving.

H&M would not comment on the development of sales so far in June, but Vinge said in general it was doing better than peers.

"We judge that we are taking market share in most markets," Vinge said. "Mainly this is because we are opening new shops, but also thanks to our existing stores."

H&M said sales in its biggest market, Germany, in the second quarter had bucked a weak trend.

"Our sales have developed better than the sluggish market," Vinge said. "Catalogue sales have met the high level of expectation that we had."

Analyst Luca Solca at Sanford Bernstein said in a note that H&M should continue to do well in the second half of the year, boosted by the dollar and sourcing gains.

"A more normalized performance in the key German market after the poor showing in March and April could mean that H&M is better placed than Inditex in the short-term, as Spanish consumption weakens," he said in a note.

Industry body Textilwirtschaft said sales in Germany in the first week of June were up 6 percent but fell 2 percent in the second week.

Spanish rival Inditex, owner of the Zara clothing chain, last week reported a 10 percent rise in first-quarter net profit, and a 9 percent rise in sales that were also buffeted by unseasonably cold weather across Europe in April.

Inditex, Europe's largest clothing retailer, stuck to its full-year like-for-like sales target of 4 percent.

Inditex was trading around 13.4 times estimated 2008 earnings, a discount to Hennes & Mauritz at 17 times this year's earnings before H&M's results.