H&M upbeat as profits rise, plans more global store upgrades

H&M said on Thursday that its operating profit rose in Q2 (the quarter covering March to May), but while the rise was smaller than analysts had predicted and the overall picture on sales for this month wasn’t particularly encouraging, it’s undeniable that the company is making progress.

Sales for June are expected to be down 6% in local currencies year on year, although it explained that the June figure needs to be seen “in the light of strong comparative figures from 2023”. 

June has been dented as “unstable weather” in many of the group’s large markets at the start of the month “had a negative impact on sales, but sales recovered as the weather normalised at the end of the month. A well-composed inventory has also enabled a later start to sale compared with the previous year”.

So there’s good news in there and looking at Q2, the numbers may have undershot analyst predictions but they were a noticeable improvement for the Swedish group, which is the world’s second-largest fashion retailer.

The numbers

Q2 operating profit reached SEK7.1 billion (€629m/£532m/$672m) which was clearly much better than the year-earlier SEK4.74 billion. Yet analysts had expected around SEK7.37 billion, although unlike some situations when actual numbers come in lower than expectations, at least the company’s shares weren’t punished in early trading on Thursday and they managed to rise.

Net sales in Q2 increased by 3% to SEK59.6bn and were also up 3% in local currencies.

Gross profit increased by 11% to SEK33.57 billion, which corresponds to a gross margin of 56.3% compared to 52.7% a year earlier. Profit after tax increased by 52% to SEK4.995 billion and it saw a “significant improvement in cash flow from operating activities”.

For the first half as a whole, net sales rose only 1% to reach SEK113.27 billion. They were flat in local currencies so clearly the second quarter was a noticeable improvement on the first.

Operating profit for the half increased to SEK9.175 billion, corresponding to an operating margin up to 8.1% from 4.9%. And net profit increased to SEK6.196 billion from SEK3.828 billion.

Upbeat CEO

CEO Daniel Ervér said: “We achieved our best results for many years in the second quarter, showing once more the H&M Group’s strength and robust financial position, with strong cash flow as well as improved profitability and sales. We are now raising our ambitions further to strengthen the brand, the customer offering and the shopping experience. With a focus on our customers, committed colleagues and a faster pace of investment in the second half of the year we see good conditions for continued profitable, long-term and sustainable growth.”

Ervér added that SS24 collections “have been very well received, which is reflected in the improved sales in the second quarter. We are seeing growth within all customer groups and a positive trend in all regions”.

And he said that with “a sharp increase in profit for four consecutive quarters, we are well on the way to achieving our long-term goal of profitability exceeding 10% over time. Our goal of an operating margin of 10% for full-year 2024 remains in place”.

But there’s a caveat as he added that “the conditions for achieving that level this year have become more challenging as it is assessed that external factors that influence our purchasing costs and sales revenues, including materials and foreign currency, will have a more negative impact than we expected in the second half of the year”.

Investment in growth

Yet after achieving its “best profit and cash flow for many years” in Q2, the company is upbeat and said it’s “now taking the next steps with forward-looking initiatives to strengthen the brand, the customer offering and the shopping experience. We have one of the fashion industry’s largest design teams that has created amazing collections for this autumn. Our customers will be able to discover what’s new this autumn in exciting ways through global and local fashion campaigns, unique events and inspiring collaborations”.

H&M said its upgraded stores in “London, New York, Seoul and Tokyo have been very well received by our customers. In the second half we are increasing the pace of investment and bringing the new store formats with the latest in digital services and a locally adapted assortment into stores to create an elevated experience, including in Paris, Milan, Berlin, Stockholm, Hamburg, Munich and more stores in New York and London”. 

During the spring it also “successfully tested an updated online store that we are launching in our larger markets during the autumn. The new digital experience will give our customers more inspiration, clearer recommendations on how our products can be styled and which fit is right for them”.

And it’s “continuing to invest in the supply chain, where we are seeing positive effects from better availability of the right products between the channels and greater precision when the lead time from design to the product reaching the customer is shortened”.