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 certain others are affected more by external influences. There are risks and uncertainties related to fashions, weather situations, quota systems and exchange rates, but also in connection with expansion into new markets, the launch of new concepts, changes in consumer behaviour or handling of the brand.
Fashion
Working 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 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 during the season.
The purchasing patterns are relatively similar in the various markets, but differences do occur. For example, the start of the season and the length of the season can vary between countries. Both delivery dates and volumes of goods for the different countries and stores are adjusted accordingly.
The weather
H&M’s goods are bought and launched in stores on the basis of normal weather patterns. Major deviations from normal conditions may affect sales. The effect will be greatest if there are major deviations at the beginning of a season.
Textile quotas
The textile industry has been working with textile quotas for many years. Changes in textile quotas could have an effect on buying costs. The textile quotas affect the entire industry and are therefore largely competition-neutral.
Foreign currency
The most significant purchase currencies for the Group are the US dollar and the euro. Fluctuation in the dollar/euro exchange rate is the single largest transaction exposure for the Group.
To hedge the product flows in foreign currencies and thus reduce the effects of future exchange rate fluctuations, the majority of the Group’s product flows are hedged under forward contracts on an ongoing basis throughout the year. Information on hedge accounting is provided in Note 1, Accounting Principles, and also in Note 2, Financial Risks, on page 65 in the Annual Report 2007.
In addition to the effects of transaction exposure, translation effects also affect the Group’s results due to changes in exchange rates between the local currencies of the various foreign subsidiaries and the Swedish krona as compared with the same period in 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 equity hedging is carried out for this risk. See also Note 2, Financial Risks, on page 65 in the Annual Report 2007.
For other financial risks see Note 2, Financial Risks, on page 65 in the Annual Report 2007.