By Mary Manis and Helen Reid
STOCKHOLM (Reuters) – H&M (ST:) scrapped its profit margin target for 2024 as high discounting, costs and fierce competition hurt operating profit in the third quarter, sending shares in the world’s second-biggest fashion retailer down about 8%.
H&M has struggled to boost profitability amid high inflation, weak consumer demand and competition from bigger Spanish rival Zara, owned by Inditex (BME:), and Shein, a fast fashion online store with discount prices.
“We currently estimate that operating margin this year will be below 10%,” CEO Daniel Erfer said in a statement.
H&M said costs associated with the closure of its online fashion outlet Afound hit earnings, as did currency movements, and that the cost of discounts increased during the quarter.
The Swedish retailer has also increased marketing spending as part of Erver’s strategy to elevate the brand.
The company had warned in June that factors such as material costs were making the 2024 target more difficult to achieve, but scrapping the target entirely without new margin guidance increases pressure on Erver, who has been CEO for just eight months, to accelerate the turnaround.
H&M’s operating margin for the first three quarters was 7.4%, with a margin of 5.9% in the third quarter. The last year H&M achieved a double-digit operating margin was 2017.
“Growth rates were widely expected, so it shouldn’t be a huge surprise, but the weak margins will continue to disappoint,” said William Woods, an analyst at Bernstein.
An early drop in H&M shares erased some of its recent gains, which had been fueled by investor hopes for a recent improvement in business after bad weather during the summer months kept shoppers from spending money.
Technology shares were down 5% by 0755 GMT, among the biggest losers on the European stock market.
Intensive marketing campaign
Erver defended his plan, saying H&M was “raising the bar” and strengthening its brand by investing in marketing, products and the shopping experience.
H&M said its fall collection had been well received and that it expected September sales to rise 11% in local currencies compared to the same period last year.
The retailer has been heavily marketing the collection, hosting a party at London Fashion Week that included a performance by pop star Charli XCX, one of 12 events in eight cities overall to market the clothes.
H&M, which does not release detailed marketing figures, said spending in the fourth quarter would be “slightly higher” than in the third quarter.
“Charli XCX is not cheap,” Woods said.
H&M said the cost of discounts would be somewhat higher in the fourth quarter, and that its clothing inventories had risen to 17.8% of its sales over 12 months, due to transport disruptions caused by insecurity in the Red Sea.
Operating profit in the third quarter came in well below analysts’ expectations, at 3.51 billion Swedish kronor ($346 million) compared to 4.74 billion Swedish kronor a year earlier.
Thursday’s earnings report was only the second under Erver, a longtime company veteran who took over in late January after his predecessor’s surprise resignation.
H&M also said it would buy back 1 billion crowns worth of shares between Sept. 26 and Nov. 26. Its shares have been undervalued by Inditex over the past few years, and are down 5% so far this year.
Its results contrast with those of Inditex, which earlier this month reported a jump in sales of its autumn-winter collection after a sluggish summer, while Britain’s Next raised its profit forecast on the back of better-than-expected recent trading.
(1 dollar = 10.1443 Swedish krona)