H&M shares jump 14% as profit smashes expectations

HONG KONG, CHINA – 2021/08/07: Pedestrians cross the street in front of the Swedish multinational clothing design retail company Hennes & Mauritz, H&M, store in Hong Kong. (Photo by Budrul Chukrut/SOPA Images/LightRocket via Getty Images)

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Shares of H&M leapt 14% in early deals on Wednesday, after the Swedish retailer significantly beat profit expectations for its fiscal first quarter.

Operating profit rose to 2.08 billion Swedish kronor ($196 million), versus the 1.43 billion kronor forecast in a poll of analysts by LSEG, formerly known as Refinitiv. The company’s operating margin rose to 3.9% from 1.3%, as it reiterated its target of a 10% operating margin this year.

Net sales fell year on year in the first quarter, hitting 53.7 billion kronor from 54.9 billion kronor.

H&M has previously announced a focus on profitability, amid pressure from growing competition from Zara owner Inditex and Chinese fast-fashion retailers, such as Shein.

“Development continued in the right direction in the first quarter with an improved gross margin and operating profit, lower inventory and strong cash flow,” said H&M Group CEO Daniel Ervér, who joined the company at the start of the year after the surprise resignation of Helena Helmersson.

In a call with analysts after the result publication, Ervér said that strengthening sales was the company’s top priority, and that prices are expected to be lower at the end of 2024 than in the beginning of the year, according to a Reuters report.

Inventory decreased by 7% year on year in the quarter. A build-up of excess unsold stock has been a longstanding problem for the firm, which has made reducing this inventory a core focus.

H&M’s board will propose a dividend of 6.5 kronor per share in its May annual general meeting and seek authorization for a buyback of its B shares, the company said Wednesday.

Analysts at Jefferies said the quarterly results showed a “mixed top line delivery,” but also a “sizeable gross margin beat” of 51.5%.

Credibility was lent to the company’s 10% operating margin target by positive sales momentum in the early spring/summer season, the Jefferies note added.

H&M’s share price has been choppy in recent years, sliding 37% in 2022 before gaining 57% in 2023.