Fashion retailer H&M surprises with Q1 profit but March sales disappoint

Cost-cutting measures started to bear fruit despite consumers curbing spending, but the fashion retailer said a cold spell is holding back sales in March

The H&M clothing store is seen in Times Square in Manhattan, New York, US, Nov 15, 2019. REUTERS

Fashion retailer H&M reported a surprise operating profit for the December to February period as cost-cutting measures started to bear fruit despite consumers curbing spending, but said a cold spell was holding back sales in March.

While H&M showed signs of bringing its costs under control, it still struggled to compete with major rival Inditex, owner of Zara and other brands, as well as rapidly expanding fast fashion online retailers such as SHEIN and Temu.

"It is more important than ever to offer customers good value for money," CEO Helena Helmersson told analysts on a call.

Q1 profit beats expectations

CEO says company aims for 10% operating margin in 2024

Second-hand resale platform Sellpy now part of H&M

Unusually cold weather in many of H&M's key markets held shoppers back from buying spring clothing, the company said, denting its March sales figures.

Still, shares in the company jumped by 8% in early trading after the results - a move traders said was amplified by short positions on the stock.

Operating profit in the Swedish group's fiscal first quarter was 725 million Swedish crowns ($69.73 million) against a profit of 458 million crowns a year earlier. A Refinitiv poll of analysts expected a 1.10 billion crown loss.

H&M's operating profit margin was 1.3%, up from 0.9% a year earlier. Helmersson said the company expects a gross margin recovery over the year and is making progress towards its goal of a 10% operating margin next year.

Analysts at Credit Suisse said it would be "very challenging" for H&M to return to a 10% margin in 2024.

China remained a difficult market for the company, which was hit by boycotts there after saying it would not source cotton from the Xinjiang region over concerns about human rights abuses. Long pandemic lockdowns in China also dragged on retail performance.

"In China we are still not where we want to be," Helmersson told analysts on a call. "We are definitely going in the right direction, but rather slowly."

H&M said net sales for March were expected to increase by 4% in local currencies compared with the corresponding period last year. That's a slight acceleration after sales for the first quarter were up 3% from last year, but lags the competition.

"Performance was weighed by weather and could, therefore, be recovered as warmer temperatures land, but of course this result is in stark contrast to the current trading reported by Inditex," JPMorgan analyst Georgina Johanan said.

H&M said an upwards revaluation of its stake in its majority-owned Sellpy second-hand clothing platform had boosted earnings by about 1 billion crowns. Sellpy, in which H&M still holds a 79.84% stake, is now part of the group.

H&M's shares have risen 9.5% so far in 2023, while Inditex has gained 19.7%.