H&M upbeat on 2017 prospects as warm weather hits September sales

By Anna Ringstrom

STOCKHOLM (Reuters) - Budget fashion retailer Hennes & Mauritz (HMb.ST) was upbeat about prospects for profitability next year but a fall in third-quarter earnings and weak September sales sent the retailer's shares to a three-month low on Friday.

H&M's results contrast with Zara owner Inditex (ITX.MC) which has consistently performed more strongly than its smaller Swedish rival. Inditex has been able to outperform H&M in part because it can react more quickly to shifts in customer demand, making it less exposed to unexpected weather patterns.

The unusually warm weather in August and September this year hit demand for fashion in many of H&M's key markets, including Germany, its biggest.

H&M said the unexpectedly weak summer demand had left it with higher inventories than expected at the beginning of September and there was a risk of increased markdowns in the current quarter.

In September, the first month of its fourth quarter, local-currency sales were up around 1 percent, the slowest pace in a year, it said.

Some analysts are increasingly concerned that the group's sluggish sales growth over the past few years is down to more fundamental structural issues such as increased competition.

"For H&M, our key concern revolves around potential for long term margin compression given the competitive environment, and the risk posed by store sales cannibalisation as the company maintains high levels of store expansion amidst a secular shift to e-commerce," Bernstein analyst Jamie Merriman said.

The company's shares were down 3 percent at 1245 GMT, taking a year-to-date fall to 20 percent.

H&M based its more optimistic outlook partly on plans for its hefty investment in IT to start to slow next year, while improved integration between online and stores would also contribute to the turnaround.

"All this ... gives us a positive view of our opportunities for 2017 and going forward, both in terms of sales and profitability," Chief Executive Karl-Johan Persson said.

In H&M's fiscal third quarter ended Aug. 31, pretax profit fell 10 percent to 6.3 billion crowns (£566.91 million), hit by currency effects, markdowns after the warm weather, and higher long-term investment spending. The fall roughly matched analysts' expectations.

The retailer's margins have long been under pressure from a strong U.S. dollar which has kept costs high - H&M pays for its clothing mainly in Asia in dollars and makes the bulk of its sales in euros. It has also had to spend heavily on e-commerce and new concepts to keep pace with new consumer patterns and competition.

It stood by plans to launch two new separate concepts next year. This will give it nine separate brands, including COS and & Other Stories which opened in 2007 and 2013 respectively.

(Reporting by Anna Ringstrom; Editing by Greg Mahlich and Jane Merriman)