Lex: Hennes & Mauritz

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Among clothing retailers, Hennes & Mauritz has been setting the fashion during the sector’s downturn. By buying more of its merchandise overseas, keeping an eye on operating costs and focusing on value for money, it steadily gained share in its core markets of continental Europe. The question remains whether its formula will work as well in better times.

Paradoxically, its latest monthly figures may offer more reassurance on sector demand than H&M’s own prospects. July’s sales growth of 14 per cent at constant currency was eye-grabbing, especially when set against the decline in like-for-like of 5 per cent at Gap. Strip out increases in selling space, however, and H&M’s like-for-like growth was probably around 1 per cent.

Hardly exciting, especially as it is flattered by last year’s weak figures, a factor that should continue to help H&M. But apart from expanding in North America, it is mainly adding stores in countries where it already has a strong presence. The fact that it has not cannibalised existing store’s sales suggests some potential for healthy overall growth.

The snag is that H&M needs to capture an increasing part of that growth to justify its premium rating at 22 times this year’s earnings. Shifting its focus to better quality and higher fashion content risks endangering either its value appeal or its margins. With inventories probably still high after a poor start to its spring collection, it will have to do extremely well this autumn just to meet investors’ expectations.

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