• by Sarah Mahoney , September 25, 2006

When H&M prepared to open the doors of its new Pasadena, Calif. store last week, it encountered something unprecedented. At 6 p.m. on the eve of the opening, young women were already lining up with blankets, prepared to camp out all night to be among the store's earliest shoppers.

On Thursday, Spanish retailer Inditex SA--owner of Zara, another fast-growing European chain that has set its sights on the U.S.--announced that earnings for the first half of the year were up 20 percent, while sales in the period climbed an impressive 23 percent.

These stores are winning over the wallets of a devoted group of women, who count on them for fast fashion. Both chains pride themselves on turning runway looks into retail bargains--great blouses can cost $20 and chic coats can be had for $80.

Relatively speaking, there are very few such stores in the U.S.: Zara has 21 stores here, while H&M has 109 (and plans to increase that by more than 20 percent in the next year.) So far, sales from these stores account for only a small percentage of the U.S. apparel market, which NPD Group estimates at $181 billion.

While small in the U.S., both chains are behemoths in Europe. Inditex, which passed H&M in annual sales for the first time last year, reported net income for the quarter of $184 million, on sales of $2.24 billion. And H&M, which is expected to report quarterly results next week, had profits of $375 million in its most recent quarter, on sales of $2.4 billion.

Experts expect them to continue to grow in the U.S., as they have in Europe. "It is the hot new thing," says Patricia L. Edwards, an analyst who covers the retail industry for Wentworth, Hauser & Violich in Seattle. "The customer has really responded to the idea of this fresh new fashion. You don't have to go to New York or San Francisco anymore."

H&M, owned by Swedish retailer H & M Hennes & Mauritz AB, for example, prides itself on mixing up its merchandise every day to keep its customers intrigued. And Zara has said it can take a look from the red carpet to its stores in a matter of weeks.

"The best retailers are starting to take notice, and do that as well," says Edwards, who points out that Nordstrom--while serving a very different market--performs best when women's clothing is not on sale, "when items are brand new. And even Wal-Mart is starting to recognize that there is no such thing as one-size-fits-all, and adopt to each local microclimate."

For traditional retailers like Federated's Macy's, already pressured by price competition from lower-end chains, the success of fashionable bargain brands like H&M and Zara simply turns up the heat.

"Macy's is making an attempt to hip up its image, sponsoring 'Project Runway,' for example, and emphasizing its younger store brands," says Edwards. "But for a lot of the women who shop at stores like H&M, full-service department stores are simply someplace their grandmother shops."