However, H&M noted that second quarter sales performed below expectations and inventory levels rose by 28%, which increases the likelihood of discounting in the third quarter and subsequent impact on gross margins.

“The second quarters’ sales were weak. Even if the trend during the quarter was rising, the total sales level was not reached as planned,” said a company statement.

H&M’s second quarter operating margin was 22.3%, down from 22.8% in the previous year, due to increased costs for re-introduced quotas and price reductions.

Net income at the Swedish company in the three months ended May 31 rose to SEK 2.65 billion from SEK 2.36 billion in the prior year period. Sales gained 10% to SEK 17.06 billion.

The retailer has said it plans to increase its store count to 1,343 this fiscal year. It opened 57 new stores in the first half of this fiscal year, and signalled that China will become a new market for H&M in 2007. Contracts have already been signed for one store each in Shanghai and in Hong Kong. New stores are also scheduled this year for US, Spain, Germany, the UK, France, Poland and Canada. It currently operates 1,244 stores.

H & M says it will also open a new lifestyle store chain for women and men under a separate brand name and at higher price points. About 10 of these stores are planned to open in selected markets in 2007.

For the half year, H&M said Group sales amounted to SEK 32.13 billion, up 14% on SEK 28.09 billion in the prior year. Group profit after tax was SEK 4.45 billion.

For a more analytical look at Hennes & Mauritz going forward, see the July issue of The Apparel Analyst. Reserve your regular monthly copy of the newsletter by clicking here.