Key Takeaways
- The Swedish retailer’s Q3 operating profit reached 6.04 billion Swedish crowns, surpassing analyst expectations of 5.14 billion crowns.
- The company’s gross margin expanded to 54.0% from the prior year’s 52.9%, exceeding projections.
- Shares of H&M declined approximately 2-3% following September sales guidance showing modest 1% growth.
- Under CEO Daniel Erver’s leadership, the company is implementing shorter production cycles and relocating manufacturing closer to markets for quicker trend response.
- The retailer experienced a 1% sales decline in Western Europe during the quarter, attributed by Erver to sustained consumer financial strain.
H&M (HMb) shares fell as much as 3% Thursday morning before stabilizing at approximately 2% down, despite the Swedish apparel company reporting third-quarter earnings that exceeded Wall Street expectations.
H&M Hennes & Mauritz AB ADR, HNNMY
The retailer’s operating profit for the three months ending in August totaled 6.04 billion Swedish crowns, representing an increase from 4.91 billion crowns in the same period last year. This figure significantly surpassed the consensus forecast of 5.14 billion crowns from analysts surveyed by LSEG.
The company’s gross margin performance also exceeded expectations, climbing to 54.0% versus 52.9% in the previous year’s quarter. Analyst projections had anticipated a margin of 53.4%.
However, investors reacted negatively to the company’s forward-looking statements. The retailer indicated that September sales are projected to increase by merely 1% when measured in local currencies, mirroring the underwhelming growth rate observed during the third quarter.
This modest figure presents a stark comparison to competitor Inditex, Zara’s parent company, which announced 9% sales growth earlier this month. The disparity highlights H&M’s current competitive positioning within the fast-fashion landscape.
Accelerating the Supply Chain
Daniel Erver, who assumed the CEO position in January 2024, has prioritized cost optimization and supply chain efficiency throughout his tenure. Speaking with Reuters, he revealed that the company has reduced its production timeline to just six weeks from initial design to retail availability.
The strategic objective involves increasing the proportion of inventory purchased through this accelerated process, minimizing the delay between identifying emerging trends and delivering products to consumers. Erver emphasized that this agility has become increasingly critical given unpredictable climate conditions and rapidly evolving fashion preferences.
Performance in Western Europe, representing H&M’s primary market, painted a more challenging picture. Regional sales contracted by 1% throughout the quarter. Erver attributed this decline to consumers facing prolonged economic challenges.
Operational restructuring also contributed to regional headwinds. The company shuttered its Belgian distribution center during the quarter, creating temporary revenue disruptions in the territory.
One-Time Tariff Benefits Unlikely to Recur
A portion of this quarter’s profit improvement stemmed from a non-recurring reimbursement related to US tariff obligations. H&M explicitly stated that similar refunds are not anticipated in future periods.
Transportation expenses increased moderately during the quarter, identified by the company as an external headwind affecting procurement costs. Promotional markdown expenses remained relatively stable year-over-year.
For the upcoming fourth quarter, H&M anticipates external conditions will prove somewhat unfavorable compared to the prior year. The company also expects markdown costs as a percentage of revenue to increase marginally, linked to an extended promotional period preceding Black Friday this year.
The retailer continues reducing its physical footprint while investing in store modernization for remaining locations. Approximately 20% of its roughly 4,000 stores worldwide have undergone renovation.
Digital commerce currently represents over 30% of H&M’s total revenue. Additional distribution facilities are scheduled to launch across Europe within the next twelve months to accommodate this expanding channel.
Erver also commented on the European Union’s recently implemented customs duties on low-value e-commerce shipments, regulation he had publicly supported to create competitive parity against ultra-fast-fashion rivals Shein and Temu. He indicated the policy is unlikely to materially impact H&M’s revenue.
Total third-quarter sales reached 57.189 billion Swedish crowns, marginally exceeding the 57.017 billion crowns recorded in the comparable period last year.
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