Profits at the world’s number two fashion retailer, H&M, were dented by an expansion drive of more than 300 store openings in an effort to size up to rival clothing firm Inditex.
The Swedish-based firm said the knock-on effects of tough competition in European markets were also reflected in a drop of net profits for the last quarter to £528 million, from £534m during the same period the previous year.
The profit drop halts a revival at the fashion retailer, which had reported earnings growth in each of the last three quarters after five consecutive declines.
Despite a tough economic backdrop which led to widespread price promotions and markdowns across the fashion industry, net profit for the full year came in at 16.87bn kronor up 7% on the same period last year.
H&M plans to open a total of 325 stores during the next 11 months, mostly within China and the United States. It also intends to launch internet retail within America during the year.
According to H&M, the debt crisis in Europe and rising unemployment took its toll on its shoppers, who increasingly tightened their belts.
In a bid to match Spanish rival Inditex, which owns 4,000 outlets worldwide and which counts high street clothing and accessory chain Zara among its successful brands, H&M ploughed “large long-term investment” into its online retail sector and opened 304 new shops during the year ended November 30.
“These long-term investments have created cost increases and to a great extent have not yet generated any revenue,” said chief executive Karl-Johan Persson.
“However, we consider these investments to be both necessary and wise as they aim to secure future expansion and profits and thereby, further strengthen H&M’s position.
“H&M continues to stand strong in a challenging clothing market,” he added.
According to H&M, the increased outlay in investment will allow it to open numerous stores bearing its new brand “& Other Stories” across the UK, Spain, Germany, Denmark, Italy, France and Sweden during the six months to May.
The new brand will focus on women’s shoes, bags and accessories.
However, despite fourth quarter results being slightly behind expectations, H&M shares rose yesterday by 1.10p to 236p.
Analysts at Sanford C Bernstein said the results last year for H&M were “disappointing”.
“As management continues to step up investment in both the product and longer term initiatives, sales performance has not rebounded,” they said.
Anne Critchlow, analyst at London’s Societe Generale SA said: “Costs weren’t quite as tightly controlled in the fourth quarter as they were for the rest of the year.”
January sales were “the most disappointing element”, she said.