September 29, 2011, 7:57 AM EDT
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By Armorel Kenna
(Updates with analyst’s comment in sixth paragraph, CEO quote in 11th.)
Sept. 29 (Bloomberg) -- Hennes & Mauritz AB, Europe’s second-largest clothing retailer, reported a drop in third- quarter earnings that beat analysts’ estimates as the company contained the impact of higher cotton prices and wages in Asia.
Operating profit fell 17 percent to 4.71 billion kronor ($700 million) in the three months ended Aug. 31, Stockholm- based H&M said today in a statement. The average of 17 analyst estimates compiled by Bloomberg was 4.35 billion kronor. The gross margin narrowed to 58.6 percent from 60.5 percent a year earlier, beating the 57.8 percent average estimate.
H&M shares rose to the highest in more than a month. In addition to a near doubling in the price of cotton last year, the retailer has also had to contend with higher labor expenses in Asia, where it gets about 75 percent of its clothes. Future earnings may benefit from a 54 percent decline in cotton prices since they surged to a record in March.
“Gross margin is a relief,” Jan Meijer, an analyst at ING Commercial Banking in Amsterdam, said in an e-mail. “The market was worried that H&M margins would be impacted heavily by higher cotton prices and wages in Asia.”
H&M gained as much as 5.7 percent in Stockholm trading and was up 9.2 kronor, or 4.7 percent, at 205 kronor as of 1 p.m.
“The third quarter could have been a lot worse from an input costs perspective, given higher cotton costs still filtering through to the company,” Societe Generale analyst Anne Critchlow said in an...