Key Highlights
- Operating profit reached 6.04 billion Swedish crowns in Q3, surpassing analyst expectations of 5.14 billion crowns.
- Gross margin expanded to 54.0% versus 52.9% year-over-year, exceeding forecasts of 53.4%.
- Shares declined approximately 2-3% following guidance showing September sales growth of only 1%.
- CEO Daniel Erver continues implementing strategies for faster production cycles and trend responsiveness through near-market manufacturing.
- Revenue in Western Europe declined 1% during the quarter, attributed to ongoing consumer spending pressures.
H&M (HMb) shares tumbled by as much as 3% during Thursday trading before stabilizing at a 2% decline, despite the Swedish apparel giant delivering better-than-expected earnings for its third fiscal quarter.
H&M Hennes & Mauritz AB ADR, HNNMY
The retailer reported operating profit of 6.04 billion Swedish crowns for the June-August period, a significant increase from 4.91 billion crowns in the same quarter last year. This result comfortably surpassed the analyst consensus of 5.14 billion crowns compiled by LSEG.
The company’s gross margin also exceeded expectations, climbing to 54.0% compared to 52.9% in the prior-year period. Market watchers had anticipated a margin of 53.4%.
However, the forward-looking guidance failed to inspire confidence among shareholders. The company disclosed that September revenue is expected to increase by a mere 1% in local currency terms, mirroring the lackluster growth rate observed throughout the third quarter.
This modest performance contrasts sharply with competitor Inditex, Zara’s parent company, which announced 9% sales expansion earlier this month. The disparity highlights the competitive challenges H&M currently faces in the fast-fashion landscape.
Accelerating Product Turnaround Times
Daniel Erver, who assumed the CEO role in January 2024, has prioritized operational efficiency and supply chain optimization during his leadership. In comments to Reuters, he revealed the company has reduced the timeline from design concept to retail floor to just six weeks.
The strategy involves increasing the proportion of inventory purchased through this expedited process, minimizing delays between identifying fashion trends and delivering products to consumers. Erver emphasized this agility is increasingly critical given volatile weather conditions and rapidly evolving consumer preferences.
The company’s most important market, Western Europe, presented a more challenging picture. Regional sales contracted 1% during the reporting period. Erver attributed this weakness to consumers experiencing “a lot of pressure for a long time.”
Operational restructuring also impacted results. The closure of H&M’s Belgian distribution center during the quarter created headwinds for regional revenue performance.
One-Time Tariff Benefits Not Expected to Continue
A portion of this quarter’s profitability boost stemmed from a non-recurring refund related to previous US tariff payments. H&M explicitly stated that similar refunds are not anticipated in future periods.
Shipping expenses increased during the quarter, which the company identified as an external headwind affecting procurement costs. Promotional markdown expenses remained relatively flat compared to the previous year.
For the upcoming fourth quarter, H&M anticipates external cost pressures will be moderately unfavorable versus last year. Markdown expenses as a percentage of revenue are projected to edge higher, partially due to an extended promotional period leading up to Black Friday this year.
The retailer continues reducing its physical footprint while investing in existing locations. Approximately 20% of its nearly 4,000 stores worldwide have undergone renovation.
Digital commerce now represents over 30% of H&M’s total revenue. The company plans to activate additional European distribution facilities within the next year to support this expanding channel.
Erver also commented on the European Union’s newly implemented customs duties on low-value ecommerce shipments, regulations he previously advocated for to create competitive parity against Shein and Temu. He indicated these changes are unlikely to materially impact H&M’s sales performance.
Total third-quarter revenue reached 57.189 billion Swedish crowns, marginally higher than the 57.017 billion crowns recorded in the comparable period last year.
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