Fast fashion falters as H&M profits dive

Profits are down 18% at budget fashion favourite H&M.

by Elizabeth Anderson
Last Updated: 06 Nov 2012
Cheap-but-chic H&M is the latest retailer to report its suffering at the hands of the gloomy consumer outlook.  The Swedish fashion giant posted a net profit down 18% from a year ago due to rising cotton prices and labour costs, as consumer spending fell.

Net profit in the six months to May was down to 4.26bn kroner (£412m), compared with 5.21bn kroner the same time last year.  It’s the third time Hennes & Mauritz, which is the world’s second biggest clothing retailer, has reported a year-on-year fall in profits.  

The fashion chain, like other retailers, has suffered from the rising cost of raw materials. The price of cotton soared by 50% and hit a 15-year high towards the end of last year.  H&M, aware of its low-price label, decided not to pass on the higher costs to its customers, unlike other retailers (clothing retailer Next raised prices by 8% earlier this year.)

This decision squeezed profits and caused gross margins to slip to 61.7%, from 65.9% the same time last year.  Discounts and promotions, in the hope of attracting more customers during the competitive economic climate, also put pressure on earnings.  ‘During the spring, the fashion retail industry has been characterised by many price campaigns and special offers,’ chief executive Karl-Johan Persson said. Wage increases in Asia, where the company sources most of its clothes, and a strong Swedish kroner didn’t make the situation any better.

The downbeat results reflect the grim outlook for high street fashion retailers at the moment.  This month New Look reported disappointing full-year results following a fall in sales, while Jane Norman was put up for sale after performing poorly.   On the other hand, Zara owner Inditex reported a 10% rise in net profit for the last quarter, which was partly attributed to the fact that it sources most of its products in Spain, Portugal and North Africa.  Many luxury fashion brands, by contrast, have seen sales grow, particularly in emerging markets where their customers aren’t feeling the pinch to anything like the same degree.

But H&M may have another trick up its sleeve- it was announced today that leading fashion house Versace will be launching a collection this autumn across 300 H&M stores and online.  That might attract swathes of customers to the high street store in search of a Versace item at a fraction of the usual cost.  Then again, it may be just be fashionably too late for the chain’s fortunes this year. 

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