H&M Shares Decline as Gross Profit Dips Due to Rising Costs and Weaker Sales

Shares of H&M Group experienced a decline on Thursday following a report indicating a drop in gross profit, which decreased by 2.8% year-on-year to SEK 30,133 million.

Net sales for the quarter also saw a downturn, falling by 3.1% year-on-year to SEK 59,011 million. At 3:34 am (0734 GMT), H&M Group’s stock was trading 7.6% lower at SEK 167.6.

Despite the overall decline, the company achieved a slight improvement in gross margin, which rose to 51.1%, up from 50.9% in the third quarter of 2023.

Daniel Ervér, CEO of H&M, noted that the quarter faced initial challenges due to sluggish sales in June, which were influenced by unusually cold weather across several key European markets.

Operating profit, however, saw a more significant contraction, declining by 26% to SEK 3,507 million, resulting in a lower operating margin of 5.9% compared to 7.8% in the previous year.

The drop in profitability was partially driven by an increase in selling and administrative expenses, which grew by 1% to SEK 26,602 million. When adjusted for local currencies, these costs rose by 4%, further straining margins.

Analysts from RBC Capital Markets highlighted that the quarter included SEK 550 million in costs related to long-term marketing investments and winding-down expenses, particularly for Afound, which were largely attributed to these marketing initiatives.

After-tax results also mirrored these challenges, with profits falling to SEK 2,307 million, down from SEK 3,319 million in Q3 2023. This resulted in a decrease in earnings per share, which dropped to SEK 1.44 from SEK 2.04 in the same period last year, marking a decline of 31%.

Furthermore, cash flow from operating activities weakened to SEK 8,215 million compared to SEK 12,257 million the previous year.

Ervér commented on the ongoing pressures faced by consumers due to high living costs and external turbulence that have adversely affected sales revenue and purchasing costs more than anticipated.

On a positive note, the company’s inventory increased by 3% to SEK 41,738 million, signaling a higher stock level. H&M management expressed confidence in the quality of this inventory, describing it as suitable for anticipated demand.

Additionally, the company’s autumn collection has been positively received, with expectations for a 11% increase in September 2024 sales in local currencies compared to the same period last year.

Looking ahead to Q4, analysts indicated that external factors are expected to negatively impact gross margins, and the cost of markdowns is anticipated to rise year-on-year. Marketing investments are set to continue in Q4, with expected costs slightly surpassing those of Q3.