H&M scrapped its earnings margin target for 2024 as higher discounting, costs and fierce competition hurt operating profit in the third quarter, sending shares in the world’s No.2 listed fashion retailer down as much as 8%.
H&M has struggled to boost its profitability amid high inflation, weaker consumer demand and competition from its bigger Spanish rival Zara, owned by Inditex, and cut-price online fast-fashion retailer Shein.
“At present we estimate that this year’s operating margin will be lower than 10%,” Chief Executive Daniel Erver said in a statement.
H&M said costs related to shutting down its online fashion outlet Afound hurt profit, as well as currency movements, and that the cost of markdowns had increased over the quarter.
The Swedish retailer has also increased marketing spending as part of Erver’s strategy to elevate the brand.
It had cautioned in June that factors such as material costs made the 2024 target harder to reach, but scrapping the goal entirely with no new margin guidance increases the pressure on Erver, who has been CEO for just eight months, to accelerate the turnaround.
H&M’s operating margin for the first three quarters was 7.4%, with a third-quarter margin of 5.9%. The last year H&M produced a double-digit operating margin was 2017.
“The growth rates were widely expected so shouldn’t be a huge surprise but the margin weakness will continue to disappoint,” said Bernstein analyst William Woods.
The early fall in H&M shares erased some of their recent gains fuelled by investor hopes that business had improved recently after poor weather during the summer months put shoppers off splashing cash.
They were down 5% at 0755 GMT, among the biggest fallers on the pan-European STOXX 600.
Marketing blitz
Erver defended his plan, saying H&M was “raising the bar” and strengthening its brand by investing in marketing, products, and the shopping experience.
H&M said its autumn collection was very well received and that it expects September sales to rise by 11% in local currencies compared with the same period last year.
The retailer has been on a marketing blitz for the collection, hosting a London Fashion Week party featuring a performance by pop star Charli XCX, one of 12 events in eight cities overall to market the clothes.
H&M, which does not publish granular figures on marketing, said spending in the fourth quarter would be “a little higher” than the third quarter.
“Charli XCX doesn’t come cheap,” said Woods.
H&M said the cost of markdowns would be somewhat higher in the fourth quarter, and that its stocks of clothing increased to 17.8% of rolling 12-month sales, due to transport disruptions caused by insecurity in the Red Sea.
Operating profit for its third quarter came in far below analysts’ forecasts, at 3.51 billion Swedish crowns ($346 million) against 4.74 billion a year ago.
Thursday’s earnings report was only the second under Erver, a long-time company insider who took the helm in late January after the sudden resignation of his predecessor.
H&M also said it would buy back shares worth 1 billion crowns, from Sept. 26 to Nov. 26. Its shares have lagged Inditex’s over the past years and are down 5% so far this year.
Its results contrasted with Inditex which earlier this month reported a jump in sales of its autumn/winter collection after a sluggish summer, while Britain’s Next raised its profit forecast on the back of better than expected recent trading.
