H&M beats Q2 expectations, well-positioned for 2nd half

Posted Jun 25th 2009 12:00PM by Tom Johansmeyer
Filed under: Earnings Reports, Industry, Employees

Affordable fashion retailer Hennes & Mauritz (OTC: HMRZF) beat profit and margin expectations for the second quarter of 2009, as currency swings are becoming less costly. Gross margins reached 61%, ahead of the 60.2% forecasted by analysts for the world's third largest clothing retailer. Even though some sales figures were under pressure, H&M has turned in a strong quarter and is well-positioned for the rest of the year, particularly in a tight market for consumers.

H&M's pre-tax profits increased 6.4% to $735 million for the second quarter (which ended on May 31, 2009). The mean forecast was $721 million, according to a Reuters poll. May sales were unchanged from May 2008, though a 1.4% gain was expected. Sales in stores open for at least a year dropped 9%, rather than the forecasted 8.5%. Nonetheless, the positive developments more than offset the negative.

With an easier currency environment and little change to markdowns year-over-year, H&M -- and Spanish rival Inditex (LSE: 0HAB) -- are outperforming other mid-market retail peers, such as Next and Marks & Spencer (OTC: MAKSY) in the United Kingdom.

As a strong retail brand with credibility on both fashion and discounting, H&M is prepared to persevere current consumer spending conditions. Customers who would normally pursue up-market fashions may now turn to the middle of the market. H&M's brand strength is evident from its Q ratio of 5.046, according to Deloitte's Global Powers of Retailing Report. The Q ratio measures the value of intangibles, which include such factors as brand. H&M has the second highest Q ratio in the world among all retailers and is top for those in the clothing sector. Inditex ranks highly among clothing and overall retailers, as well, with a Q ratio of 2.185.

So, despite some soft sales, improved profitability and evident brand strength have left H&M in as good a spot as one can find in a recession-embraced retail market. The coming two quarters are likely to be as good as they can be.

Tags: deloitte, deloitte touche tohmatsu, deloittetouche, h and m, h m, hennes and mauritz, HM, inditex, inthenews, marks and spencer, marks and spencers