Risks and uncertainties
A number of factors may affect H&M’s results and business. Most of these can be dealt with through internal routines, while some are influenced more by external factors. There are risks and uncertainties related to the fashion, weather conditions, quota systems and foreign currencies, but also in connection with expansion into new markets, launching new concepts, changes in consumer behaviour or how the brand is handled.
Fashion
Operating in the fashion industry is a risk in itself. Fashion is a perishable item and there is always a risk that one of the collections will not be well received by the customers. Within each concept H&M must have the right volumes and achieve the right balance in the mix between fashion basics and trend items. To optimise fashion precision, H&M buys items on an ongoing basis throughout the season.
The purchasing patterns are relatively similar in the various markets, although differences do exist. The start of a season and the duration of a season may, for example, vary from country to country. Delivery dates and product volumes for the various countries are adjusted accordingly.
The weather
H&M’s products are purchased and launched in stores on the basis of normal weather patterns. Major deviations from normal conditions may affect sales. The effect is the greatest if there is a major deviation at the beginning of a season.
Changes in Purchasing behaviour
There is also a risk that changes in the global economy may change consumer purchasing behaviour. It is therefore important to be aware of such changes and have a flexible purchasing model that can be adjusted to different market conditions.
Textile quotas
The textile industry has been working for many years with textile quotas. Changes in textile quotas can have an impact on buying costs. The textile quotas affect the entire industry and are therefore largely competition-neutral.
Foreign currency
The most significant currencies in which the Group’s purchasing takes place are the US dollar and the euro. Fluctuation in the US dollar/euro exchange rate is the single largest transaction exposure for the Group. To hedge goods flows in foreign currencies and thereby reduce the effects of future exchange rate fluctuation, the majority of the Group’s product flows are hedged under forward contracts on an ongoing basis throughout the year. Information on currency hedging is provided in the annual report, part 2, Note 1, Accounting Principles, and in Note 2, Financial Risks.
In addition to the effects of transaction exposure, translation effects also affect the Group’s result due to changes in exchange rates between the local currencies of the various foreign subsidiaries against the Swedish krona compared to the same period the previous year. The underlying profit/loss in a market may be unchanged in the local currency, but may increase or decrease when converted into Swedish currency depending on whether the Swedish krona has weakened or strengthened. Translation effects also arise in respect of the Group’s net assets on consolidation of the foreign subsidiaries’ balance sheets.
No exchange rate hedging, so-called equity hedging, is carried out for this risk. See also the annual report, part 2, Note 2, Financial Risks.
For other financial risks, see the annual report, part 2, Note 2, Financial Risks, on page 21.