Commodities: High cotton prices impact H&M results

22nd June 2011

The price of raw cotton has soared by 50% in a year, mainly because demand far outstrips supply. A changing climate will also be affecting cotton crops the world over. The price of cotton and other commodities has been riding high for some time.

Rising prices has far-reaching global effects, bringing better times for some cotton farmers but a squeeze on manufacturers, who are caught between higher raw material costs and pressure from the global fashion industry to keep the costs of production low. This is particularly the case with H&M, known for its "cheap chic".

The outlook remains challenging, according to H&M chief executive Karl-Johan Persson. Net profits in the December to May period fell to SKr4.26bn ($661m), compared with SKr5.21bn a year ago. This was below analysts' consensus forecast for SKr4.39bn.

The results marked the third consecutive quarter of year-on-year earnings decline as H&M struggled with the twin challenge of rising input costs and continued weakness in consumer demand across many of its core European markets, reports the Financial Times (paywall).

In addition to higher costs, H&M said margins had been pressured by intense competition following price promotions and discount campaigns to entice hard-pressed consumers.

Mr Persson, the grandson of H&M's founder, defended performance and remains optimistic about the future.

He said: "We continue to gain market shares in a very challenging market, which proves H&M's strong position. We see great potential for future growth in existing as well as in new markets."

H&M, which has about 2,300 stores in 40 countries, has expanded into new markets such as China, Japan and South Korea but remains heavily concentrated in Europe.

More on commodities on Mindful Money:

Commodities: The commodities bubble explained

Commodities: Goldman and Clive Capital to launch index

Commodities: Glencore says commodity demand slowing in China

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