H&M First Quarter Profit Slump Was Abandoned By Old Rival Inditex

The second largest clothing retailer in the world

In the first quarter, the Hayne Maurice group plunged 29.6% to 33.27 billion Swedish kronor in the first quarter, compared with 4 billion 723 million Swedish kronor in the same period last year. As a result of over discount, the gross profit margin of the company ended February 29, 2016 in the first 2016 quarter of fiscal year also slumped by 320 basis points to 55%, and gross profit increased 2.2% to 22 billion 699 million krona, which was 22 billion 213 million Swedish kronor in the same period last year.

Hayne & Maurice group, Hennes & Mauritz AB, said that because of the group's main purchase market, the US dollar settlement business in Southeast Asian market will be weakened by the impact of the strong dollar in the future until the fourth quarter may disappear, and the stock market has surged more than 5% in the morning.

In the first quarter of February 29th -2016 December 1, 2015, the H&M group's revenue grew by 9% based on the fixed exchange rate. It was far away from the old rival, the world's largest apparel retailer, Inditex SA (ITX.MC) Indo Textile Group, and the net sales growth rate of the Inditex SA Indo textile group from February 1st to March 7 was up to 15%.

In the first quarter, H&M group's revenue actually recorded an increase of 8.2% to 50 billion 624 million kronor, which was 46 billion 791 million kronor in the same period last year.

During the period, the H&M group's profit after tax was recorded at SEK 2 billion 545 million, or 1.54 kronor per share, compared with 3 billion 613 million Swedish kronor, or 2.18 Swedish kroner, a 29.6% decrease in the same period last year.

The group said the first quarter profit slump was mainly caused by increased purchasing costs and write downs.

According to data from investment banking Research Institute Sanford C. Bernstein, Sanford Bernstein, the H&M group's share of procurement in China and South Asia is as high as 80%, contrary to its competitors.

SA has only 35% of Indo textile group. Therefore, H&M group's dollar purchase cost under the strong dollar makes the group's profits under pressure.

Although Asian procurement costs are lower, exchange rate fluctuations are relatively large. Besides, such procurement strategy also makes H&M group's stock liquidity far lost to Inditex SA Indo Textile Group, while H&M group's long-term discount sale is partly thanks to this, and the profit margins are not affected by rival Inditex SA India Textile Group.

In the fourth quarter of January, H&M group has released a quarterly profit slump and stimulated the stock price crash. So the first quarter earnings market has basically digested the bad performance of the company. In addition, the group said the negative impact of the exchange rate on procurement costs will be diminishing, so the stock price of the company is still rising under the extreme downturn.

Nils Vinge, director of investment relations at H&M group, said, "the worst is over."

However, market data do not support Nils Vinge's theory. On the contrary, the bad days of H&M group are just beginning.

In mid March, Morgan Stanley (NYSE:MS) Morgan Stanley released a report that although H&M still expanded at more than 400 stores per year, the operating profit of the group would shrink by 40% by 2020.

The H&M group is at a critical point of development, that is, profits will face a sharp decline. Because at present, the Swedish group's trend will keep the growth of stores and sales and profits decline. Since 2007, H&M's operating profit per square meter has dropped from 10900 kronor to 5200 kronor, or more than 50%.

Share price performance of the four fast fashion groups in the past year

According to the data, Hennes & Mauritz AB (HM-B.ST) Hayne Maurice group has only 19.8 times earnings at present, while rival Inditex SA (ITX.MC) Indo Textile Group is 27 times.

In addition, Nils Vinge said the group was affected by cold weather and Easter in March, and sales increased by only 3%, far below market expectations.

Societe Generale Societe Generale analyst Anne Critchlow Critchlow said after the earnings report, the H&M group's earnings report had no real surprise. Despite the earnings report, the group's gross profit margin was not expected to be due to a further decline in the US dollar expectations, but group sales were rather sluggish.

However, Karl-Johan Persson, the group's chief executive, said in a statement that it needed to take a comprehensive look at sales in 3, 4 and May.

H&M group also pointed out in its earnings report that the sales and profit development of the group's e-commerce business were all "Very satisfactory".

As of March 31st, the group has added 7 new E-commerce markets to Croatia, Estonia, Ireland, Latvia, Lithuania, Luxemburg and Slovenia. The group will also launch online businesses in Japan and Greece, Canada and South Korea. In 2016, it added 11 new online markets to 34.

As for the Chinese market, with the slowdown of China's economy and the downturn of the consumer market, especially the clothing market, the H&M group's revenue in the first quarter of the Chinese market registered only 7.1% (2015 in fiscal year's annual growth rate of 41%) to 2 billion 301 million kronor, which was 2 billion 148 million Swedish kronor in the same period last year, and the growth rate was lower to 6% under the fixed exchange rate.

However, the group is still expanding rapidly in China. In the first quarter, China's market grew by 12 stores, the highest in the main market, and the 11 net increase over the US market.

At the end of last year, Karl-Johan Persson, chief executive of H&M group, was worried that the growth of China's market slowed down from the previous 30+% speed to the low level 10+%, and even to the median of the first quarter of the financial year, the group needed to worry more about this rapidly slowing market.

According to reliable data, in the 2015 fiscal year ending November 30, 2015, China is the fifth largest market of H&M group, and the growth rate of fixed exchange rate in the 2015 fiscal year is 16%, about two times that of China's overall apparel market.

The growth rate of the group in the Chinese market is lower than that of the industry.

H&M Group expects to add 425 new stores in fiscal year 2016, and the Group operates 3970 stores in the first quarter. The group said 4000th stores will open in April at Mall of India in New Delhi, India.

Although the H&M group said that the effect of exchange rate and write downs was satisfied with the current stock level, group inventories surged 24%. Three times in the first quarter to 25 billion 153 million kronor, while the fixed exchange rate increased by 25%.