H&M to delay some store openings as construction slows

Hennes & Mauritz AB said it will delay some store openings this year because of a construction slump, even as the fashion retailer reported a 23% rise in profit for the company's fiscal third quarter.

The Stockholm-based retailer said earnings in the quarter ended Aug. 31 rose to 4.24 billion kronor ($627.5 million) from 3.46 billion kronor a year earlier. Revenue rose 14% to 26.89 billion kronor.

H&M has been opening new stores at a fast pace for several years as it seeks to expand in emerging markets. The company has maintained strong growth in same-store sales, but the store openings have been a key profit driver. H&M, the world's third-largest fashion chain by revenue, behind U.S.-based Gap Inc. and Spain's Inditex SA, has about 2,000 stores across 37 countries.

H&M said Wednesday that because the economic downturn means fewer shopping malls are being built, the company has been unable to find as many prime locations for new stores, particularly in southern Europe. H&M now expects to open a net of 220 stores this year, compared with previous plans for 240 openings.

Chief Executive Karl-Johan Persson said the company has studied markets in the Southern hemisphere, including in Australia and South America, but that logistics are a hurdle. "It always demands greater resources to enter a new market, but it's especially the case on the Southern hemisphere, with reversed seasons," he said. "So we're looking at it and trying to fit it into our continuing expansion puzzle. But it is too soon to say where and what markets we plan to enter."

Retail experts attribute H&M's success during the downturn to its prices, strong distribution channels that allow it to get latest fashions to store fast, and exclusive designer collections. Since 2004, the company has signed up such designers as Stella McCartney, Karl Lagerfeld and Roberto Cavalli to provide one-off special collections for H&M stores. The collections often sell out within days. French fashion house Lanvin will be the guest designer this fall.

Third-quarter gross margin fell to 60.5% from 61.6% a year earlier and 65.9% in the second quarter. H&M cited the krona's appreciation against the U.S. dollar the krona rose about 14% against the dollar in the quarter and lower costs. H&M benefits from a weaker dollar because the company buys most of its inventory from Asia in the U.S. currency. But H&M said the benefit from lower costs mainly from spare capacity at suppliers and lower transportation and raw-material costs diminished in the third quarter from the second.

Soci t G n rale analyst Anne Critchlow said that while sales were better than expected, the drop in gross margin from last year indicated that the company had been lowering prices. "The question is: Why did H&M decrease its opening prices when there is generally clothing-price inflation in the market?" she asked.