Hennes & Mauritz (H&M) shares soared after the fashion retailer’s profit topped expectations, suggesting a focus on its core H&M brand and tight cost controls are helping its turnaround take hold.
The ramp-up in advertising over the past year helped draw shoppers back into H&M stores and online, offsetting some of the drag from an uncertain economic climate and rising trade barriers. Leaner inventories and a lift from early autumn weather also supported the Swedish fashion retailer’s results.
The latest period marks the second consecutive quarter in which results exceeded expectations, suggesting that CEO Daniel Erver’s strategy of spending on marketing and price promotions may eventually translate into a more durable sales recovery. The executive has been striving to revive top-line growth and rebuild confidence in the group’s mid-term margin target of 10% for operating profit.
“The trend suggests it may be achievable,” Bloomberg Intelligence analysts Charles Allen and Tatiana Lisitsina wrote in a note.
H&M shares soared as much as 12% in their biggest intra-day gain in more than a year in early Stockholm trading. Before Thursday, the stock had risen 5% over the past year.
Operating profit in the third quarter came in at 4.9 billion kronor ($672 million), exceeding the 3.7 billion analysts were expecting, and corresponding to an operating margin of 8.6%.
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Net sales reached 57.0 billion kronor in the three months through August, roughly in line with analyst estimates.
In September, the first month of H&M’s fiscal fourth quarter, sales are expected to be on par with the same month a year earlier, despite a tough comparison. In the period last year, sales jumped 11% on the back of cooler weather and the rollout of the retailer’s new brand positioning. The company said autumn collections had been well received.
The September sales suggest a “resilient performance” and (are) slightly ahead of expectations,” RBC Capital Markets analyst Richard Chamberlain wrote in a note.
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Earlier this month Inditex — Spanish owner of main rival Zara — had already offered a brighter signal for the sector with a stronger-than-expected start to autumn sales. The Spanish giant has long outpaced H&M in growth, thanks to its lean supply chain and faster fashion cycle.
“Through a stronger customer offering, an improved gross margin and good cost control, we have strengthened operating profit,” Erver said in the company’s earnings statement Thursday.
H&M flagged that the cost of markdowns in the fourth quarter is expected to be somewhat higher compared with the year-ago period, partly because Black Friday falls a day earlier than last year. For goods set to be sold in the current quarter, external factors will likely have a slightly positive impact compared with the same period a year earlier, the company said. It added, however, that the benefit will be smaller than in the third quarter, with higher tariff costs set to weigh more heavily on gross margins.
H&M, one of the world’s largest fashion retailers, operates in more than 50 countries. It continued to expand its footprint by opening a flagship store in São Paulo last month, its first store in Brazil.
