Cotton Prices (and Wages) Take a Bite out of H&M Profits
June 22, 2011 The second quarter of 2011 produced disappointing sales numbers for Hennes and Mauritz (H&M), the world’s second largest fashion retailer, and the company is putting the blame on two culprits: the high price of cotton and increases in employee wages.
Compared with the second quarter of 2010:
- Gross profit margin is 61.7 percent, down from 65.9 percent
- Net profits dropped to $673 million, a decrease of 18 percent
The company points out, however, that it never raised prices during the quarter, and that the disappointing results are partially due to $38.9 million that was set aside to fund an employee incentive plan.
Karl-Johan Persson, CEO of the Swedish company, issued a number of statements with the release of the figures, including:
”Sales were good in the quarter with an increase of 12 percent in local currencies. We continue to gain market shares in a very challenging market, which proves H&M’s strong position. Increasing interest rates, higher energy prices and austerity measures in many economies have decreased consumer spending power. During the spring, the fashion retail industry has been characterized by many price campaigns and special offers.
“Our profitability remained strong with an operating margin of 20.3 percent despite strong negative effects from many external factors that were beyond our influence, such as the high cotton prices.
In addition to the cost inflation in the sourcing markets, a provision of SEK 248 million related to our recently started incentive program for all employees, had a negative effect on profits. Also, the strong development of the Swedish krona continued to have a substantial negative effect on our reported profits in SEK.
“We are optimistic about the future for H&M despite challenging conditions both in the sales markets and in the sourcing markets. We see great potential for future growth in existing as well as in new markets. Our business concept works well in all our markets as seen for example in recently added and fast growing markets such as China where we expand more rapidly.”
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