Swedish fashion retailer H&M reported a much smaller than expected fall in first-quarter pretax profit on Friday as it sold more products at full price and saw an improvement in margins. Shares in the world's biggest apparel retailer after Zara-owner Inditex jumped 13 percent after its results, to 160 Swedish crowns by 0809 GMT, as it said markdowns would continue to fall in the current quarter.
The company has seen profits shrink and stocks pile up in recent years due to slowing footfall at its core-brand stores and as it has not been fast enough to react to demand swings. Pretax profit fell for the seventh straight quarter over December-February to 1.04 billion Swedish crowns ($112 million) from 1.26 billion a year ago. But it was well ahead of the 708 million forecast in a Reuters poll of analysts.
The retailer said that this month, from March 1-27, net sales rose by 7 percent in local currencies, exceeding 4 percent growth in the first quarter. H&M's heavy investment in logistics and the integration of stores and online to weather mounting competition and pressure from digitalisation of the sector, as well as a review of its stores and brands to get back on track, have been squeezing margins.
"Our ongoing transformation work has contributed to stronger collections with increased full-price sales, lower markdowns and increased market shares," CEO Karl-Johan Persson said, after the results indicated that H&M's turnaround plans were beginning to bear fruit.
RBC analysts said they expected consensus earnings upgrades of 5 to 10 percent. H&M said its gross margin inched up to 50.0 percent in its first quarter, from 49.9 percent a year ago, defying forecasts for a fall to 49.4 percent.
Markdowns in relation to sales decreased by around 1.5 percentage points in the first quarter from a year earlier and the retailer said it expected them to continue to decrease in relation to sales in the second quarter. "Supportive current trading and ongoing markdown improvements (are) likely to put shorts on the back foot," Jefferies analysts wrote in a client note.
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