PARIS – Swedish fast fashion giant H&M reported a 40 percent jump in operating profit for the third quarter, driven by an improved customer offering, better gross margin and tight cost control, despite currency headwinds, a smaller store footprint and muted sales growth in the third quarter.
Operating profit rose to 4.91 billion Swedish krona, or 428 million euros, from 3.51 billion krona, or 306 million euros, at the same time last year.
But currency effects impacted growth by around five percent. Sales were up 2 percent in local currencies during the three months to Aug. 31, while store count was reduced by 4 percent versus the same time last year.
The impact of a strong Swedish krona made those numbers less rosy, with net sales falling from 59.01 billion Swedish krona, about 5.14 billion euros, to 57.02 Swedish krona, or 4.97 billion euros.
Stricter cost controls, with administrative expenses falling 5 percent to 25.17 billion Swedish krona, and one percent in local currencies, combined with a reduction in stock of 9 percent in Swedish krona and 1 percent in local currencies, helped with the boost.
“We are taking further steps in the right direction. Through a stronger customer offering, an improved gross margin and good cost control, we have strengthened operating profit by 40 percent compared with the same quarter last year while also having reduced the stock-in-trade,” said chief executive officer Daniel Ervér.
The stronger-than-expected yet mixed results reflected Ervér’s efforts to lay the groundwork for recovery.
“We think H&M has taken various steps to improve its offer for customers, which should lead to a stronger sales performance in time. However, a lot of things have to improve together and so far the recovery has been somewhat unbalanced in our view,” RBC analyst Richard Chamberlain said in a trading note.
“We see potential for H&M to move closer to a double-digit operating margin goal over time, driven by gross margin gains and further cost efficiencies, but we see this as more of a longer term aspiration,” he added.
H&M has been squeezed between the Chinese low-cost, ultra-fast fashion players like Shein and Temu on the pricing end, and Inditex’s behemoth Zara, which has strengthened its fashion credibility, on the other end.
Ervér has been trying to upscale the brand and bring back its cool factor, including partnerships with celebrities such as Charli XCX, a runway show at London Fashion Week and downsizing its massive stores while upscaling their design quotient.
“Through a stronger customer offering, an improved gross margin and good cost control, we have strengthened operating profit compared with the same quarter last year. The increase in profit shows that we are on the right track as a result of the progress we have made in our plan,” he said.
Smaller stores indicate where he wants to take the brand. “This is a good example of how we are developing the customer experience but also strengthening our brand,” he added.
H&M also launched in Brazil in the quarter, and has its sights set on expansion across Latin America.
“We continue to focus fully on updating a large part of our stores globally, with improvements in layout, presentation and tech to further enhance the customer experience, while at the same time the physical and digital channels strengthen and complement each other,” he said.
“In an environment of ongoing uncertainty with cautious consumers, all of us within the H&M group are consistently focusing on our customer offering – always giving the best value for money.”
Looking ahead, sales in early September were “on par” with the same month last year, when they rose 11 percent.
