OUT OF STYLE

H&M is counting the cost of its far-flung supply chain

For most big retailers, a 21% rise in sales and 11% jump in quarterly profits would be reason to cheer. But H&M is under pressure today, as investors worry about what they see in the details of the Swedish group’s latest earnings report (pdf). Its shares dropped by more than 2% amid the stream of negative headlines.

Analysts are spooked by a decline in the company’s profit margin, which is suffering thanks to a stronger dollar. Sweden, like the euro zone, is afflicted with very low, and at times negative, inflation. In response, its central bank cut benchmark interest rates below zero, which has pushed down the value of the krona in relation to currencies from stronger economies; the krona, like the euro, has lost nearly 20% of its value against the dollar over the past year.

What does that have to do with H&M? Revenue in dollars is worth more, in accounting terms, when translated into the weaker krona. But so are dollar-based costs, and H&M has a lot more of those than sales. After all, the company sources around 80% of its clothes in Asia—and pays for it with dollars. This will have a “very negative” effect on the company’s cost burden for the rest of the year, the company said.

At times like these, the difference between H&M’s business model and the one deployed by its main fast-fashion rival, Inditex (the parent company of Zara), is shown in sharp relief. The market is clear about which model it prefers:

Both retailers boast large global footprints—H&M operates in 59 countries, Inditex in 88—but record the bulk of their sales in Europe. But Inditex famously keeps its supply chain short and centralized near its home market of Spain, while H&M looks to cheaper but faraway places to source its stock. With its costs matched more closely to sales, Inditex’s natural hedge means that is not as affected by the whims of currency markets as its Swedish rival.

H&M’s currency headache also comes as it sets out an aggressive expansion plan, aiming to open 400 new stores this year, including in promising new markets like India and South Africa. The company is accelerating its investments in order to “build an even stronger H&M,” chief executive Karl-Johan Persson said. But with these planned investments clashing with an unplanned rise in other costs, investors have decided that it’s not a good look.

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