H&M to Miss Margin Target as Higher Costs Hurt Earnings — 2nd Update

By Dominic Chopping

STOCKHOLM--H&M Hennes & Mauritz shares tumbled Thursday after it said it will miss a key profitability target this year as higher costs hit its third-quarter earnings.

The Swedish fast-fashion retailer is investing heavily in new product ranges and marketing as it seeks to regain market share in an increasingly competitive market, while the costs of shutting down its online discount store and currency movements also dented profitability.

Shares traded 3.8% lower in morning trade, recovering slightly after falling as much as 8.5% at the open.

After a slow start to the summer H&M said sales momentum picked up through July and August before accelerating further in September.

September is the first month of the company's fourth quarter and it said sales in the month are expected to rise 11% in local currencies on the year as its first collections of the fall have been well received by customers with good sales and strong resonance on social media.

Analysts at Deutsche Bank had expected a strong September and forecast a 12% rise in local currency sales, mainly due to a good start to the fall/winter season.

Despite the positive start to its fiscal fourth quarter--which runs to the end of November--Chief Executive Daniel Erver said the company isn't expected to hit its operating margin target this year.

The company's long-held target of reaching a 10% operating margin in fiscal 2024 was set by former Chief Executive Helena Helmersson, who unexpectedly stepped down earlier this year. H&M recently cautioned that the target was becoming harder to achieve as raw materials and currencies were expected to bite more than expected and it confirmed Thursday that the margin will likely come in below 10%.

H&M reported an operating margin of 5.9% in the quarter, versus an expected 8.1% according to LSEG Refinitiv data.

Analysts have questioned the attainability of reaching the target this year as H&M has battled lower consumer purchasing power, rising costs and fierce competition from low-cost, fast-fashion rivals such as Shein and Primark on top of its more traditional rival, Zara.

Zara-owner Inditex earlier this month reported strong sales growth in August and early September as it benefited from a positive reaction to its fall/winter collections while keeping price hikes to a minimum.

H&M's Erver has made growing sales a priority at the Swedish group and is moving the group from exclusively focusing on lower-cost fashion to offering products at a wider range of prices while also leading an investment drive to bring more manufacturing closer to its major markets to smooth logistics and purchasing. Store upgrades and digital services are also being worked on.

Speaking on a call with investors, Erver said its efforts are beginning to have an effect with some of its recent collections selling-out within hours while the company's supply chain is becoming more flexible and responsive, providing better capacity to replenish stock quickly.

"We are confident that our plan will contribute to increased sales and profitability," he said.

Currently, H&M still counts Asia as a large sourcing region though and the company is monitoring developments in the Red Sea and the global freight market while trying to minimize the impact on its product availability, freight costs and stock levels. The Red Sea situation is extending transport times and pushing the company have more goods on hand to ensure supply. Inventory levels rose 3% in the quarter.

Discounting increased somewhat and is expected to rise further, while marketing costs will also increase, both of which will likely lead to considerable consensus downgrades, analysts at Jefferies said in a note to clients.

"Soon enough the debate will start shifting onto the year ahead, but it will be overall autumn/winter delivery that will provide clearer answers as to whether the step up in operating expenditure investment will generate the required sales payback to fuel appreciable margin rebuild," the bank said.

The company reported a net profit of 2.32 billion Swedish kronor ($227.8 million) for the third quarter to Aug. 31 compared with 3.33 billion kronor a year earlier as sales fell 3.1% to 59.01 billion kronor. Analysts polled by FactSet had expected net profit of 3.33 billion kronor on sales of 60.5 billion kronor.

H&M said it has decided to buy back shares for 1 billion kronor, with the program starting Sept. 26 and continuing until no later than Nov. 26.

Write to Dominic Chopping at dominic.chopping@wsj.com

(END) Dow Jones Newswires

September 26, 2024 04:56 ET (08:56 GMT)

Copyright (c) 2024 Dow Jones & Company, Inc.