H&M Drops As Surging Costs Nearly Wipe Out Earnings
Hennes & Mauritz AB reported a slump in earnings due to its exit from Russia, costs related to a restructuring plan and higher garment prices.
(Bloomberg) -- Hennes & Mauritz AB shares fell after the Swedish clothing retailer said severe increases in energy, freight and garment prices nearly wiped out profit in the past quarter.
Operating income dropped 87% to 821 billion kronor ($80 million) in the three months through November, H&M said Friday, far off analysts’ estimates. The stock fell as much as 7.9%.
The scale of the decline is so big that investors will doubt Chief Executive Officer Helena Helmersson’s forecasts for improvement in sales and profitability, wrote James Grzinic, an analyst at Jefferies. H&M’s exit from Russia and costs related to a plan to cut 1,500 jobs also weighed on earnings. The fast-fashion giant is still struggling with high inventory levels as its profitability lags that of rival Zara-owner Inditex.
H&M buys a greater proportion of its garments from Asia than Inditex, which entails higher shipping costs. The retailer said it’s trying to shift more purchasing to nearer countries.
The company said 3.6 billion kronor were lopped off from profit due to higher costs for energy, freight and garments, plus the effect of a strong dollar, the currency in which most clothes are sourced. The dollar was at a record level against the krona in recent months.
Sales returned to growth in December and January, rising 5% during the key holiday period following a flat fourth quarter. However, the company warned that discounts are rising slightly in its first quarter, and purchasing conditions are still very negative, with prospects for improvement only later in the year. H&M said it decided not to pass on all the garment price inflation to consumers, which is also weighing of profitability.
The company reiterated a target for a operating margin of more than 10% in fiscal 2024. In fiscal 2022, the margin dropped to 3.2%, less than half the year-earlier level.
Purchasing costs are already dropping and the outlook for the second half is brighter, CEO Helmersson said in an interview. That should help fuel sales growth and margin improvement this year, she added.
Meeting the 2024 guidance will require gross margins to return to more normal levels, Chief Financial Officer Adam Karlsson said in an interview. That means H&M needs to reduce raw material, transport and energy costs, and the cost-cutting program needs to go according to plan.
H&M is committed to take steps to reach the long-term targets, which include doubling sales by 2030, Karlsson also said.
The company said it expects to close 100 stores on a net basis this year.
--With assistance from .
(Updates with CEO, CFO comments starting in eighth paragraph)
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