In a notable shift, H&M has decided to abandon its profit margin target for 2024, as mounting costs and increased discounting strategies continue to impact its financial performance. The Swedish retail giant, now the world’s second-largest listed fashion retailer, revealed these developments while grappling with heightened competition and an evolving market landscape.
During the third quarter, H&M’s operating profit dropped significantly, revealing a margin of just 5.9 percent—its lowest since 2017. This decline was attributed to several factors, including a strong Swedish currency, rising markdown costs, and the additional expenses stemming from the closure of its online fashion outlet, Afound. CEO Daniel Erver is now under pressure to devise a turnaround strategy, especially after H&M’s warning in June about the challenges facing its 2024 financial targets.
In a climate where fast fashion is increasingly dictated by consumer preferences and economic fluctuations, H&M faces stiff competition from rivals such as Zara, owned by Inditex, and budget-friendly online retailer Shein. This competitive pressure has intensified as high inflation and changing consumer behavior have led to a more price-sensitive market.
The announcement also carried good news for investors, as H&M revealed plans to initiate a share buyback worth 1 billion Swedish crowns ($98 million) from September 26 to November 26. However, despite this move, H&M shares have dropped by almost 5 percent this year and fell sharply—by up to 8 percent—right after the earnings report was released.
H&M’s operating margins for the first three quarters of the year averaged 7.4 percent, highlighting how the company has grappled with unpredictability in its earnings flow. In an effort to revitalize the brand’s image, H&M has ramped up marketing expenditures. Notably, pop star Charli XCX was brought on board for a London Fashion Week launch event introducing the Autumn/Winter collection. Erver has articulated a vision to “raise the bar” for the brand, suggesting that these marketing investments are crucial to creating excitement and consumer engagement.
Despite hurdles, H&M reported an optimistic outlook, expecting September sales to surge by 11 percent in local currencies compared to previous years. The company’s efforts to launch its Autumn/Winter collection involved hosting 12 promotional events across eight cities, showcasing its commitment to regain consumer interest.
Looking ahead to the fourth quarter, Erver acknowledged that markdown costs would be slightly higher, confirming the company’s ongoing need for tactical discounting to entice cost-sensitive shoppers. H&M has also experienced an increase in clothing stock levels relative to its sales, now reaching 17.8 percent, a marked increase from 17.1 percent a year ago. This growth in inventory levels is largely a result of transport disruptions, as well as H&M’s more assertive purchasing strategies in anticipation of shifts in seasonal demand.
Operating profits for the third quarter came in at 3.51 billion Swedish crowns—well below the previous year’s figure of 4.74 billion and missing analysts’ projections. This disappointing performance highlights an ongoing struggle for the company under what marks only Erver’s second earnings report since he took over leadership earlier this year.
The difficulties faced by H&M stand in stark contrast to the recent successes of Inditex, which reported increased sales for its Autumn/Winter collection despite a challenging summer. Furthermore, competing retailers like Britain’s Next have raised profit forecasts due to unexpectedly robust trading results.
As H&M navigates these turbulent waters, the retail landscape continues to evolve, requiring quick adaptations and innovative strategies to maintain relevance in a fast-paced market. How effectively H&M can strengthen its brand while combating pressures from competitors remains to be seen, but the actions taken today will undoubtedly shape its trajectory for years to come.
