Fashion retailer H&M surprises with Q1 profit but March sales disappoint

"Performance was weighed by weather and could, therefore, be recovered as warmer temperatures land, but of course this result is in stark contrast to the current trading reported by Inditex," JP Morgan analyst Georgina Johanan said. H&M said an upwards re-valuation of its stake in its majority-owned Sellpy second-hand clothing platform had boosted earnings by about 1 billion crowns.

Fashion retailer H&M reported a surprise operating profit for the December-February period as cost-cutting measures started to bear fruit, despite consumers curbing spending and a cold spell holding back sales of its spring collection. While H&M showed signs of bringing its costs under control, it still struggled to compete with major rival Inditex, owner of Zara and other brands, as well as rapidly expanding fast fashion online retailers such as SHEIN and Temu.

Unusually cold weather in many of H&M's key markets held shoppers back from buying spring clothing, the company said, denting its March sales figures. Still, shares in the company jumped by 8% in early trading after the results - a move traders said was amplified by short positions on the stock.

Operating profit in the Swedish group's fiscal first quarter was 725 million Swedish crowns ($69.73 million) against a profit of 458 million crowns a year earlier. A Refinitiv poll of analysts expected a 1.10 billion crown loss. H&M's operating profit margin was 1.3%, up from 0.9% a year earlier and CEO Helena Helmersson said the company was confident of a gross margin recovery over the year.

"The start of the year shows that we have taken further steps towards the goal of achieving an operating margin of 10% already next year," Helmersson said in a statement. But analysts at Credit Suisse said it would be "very challenging" for H&M to return to a 10% margin in 2024.

H&M said net sales for March were expected to increase by 4% in local currencies compared with the corresponding period last year. That's a slight acceleration after sales for the first quarter were up 3% from last year, but lags the competition. "Performance was weighed by weather and could, therefore, be recovered as warmer temperatures land, but of course this result is in stark contrast to the current trading reported by Inditex," JP Morgan analyst Georgina Johanan said.

H&M said an upwards re-valuation of its stake in its majority-owned Sellpy second-hand clothing platform had boosted earnings by about 1 billion crowns. Sellpy, in which H&M still holds a 79.84% stake, is now part of the group. H&M's shares have risen 9.5% so far in 2023, while Inditex has gained 19.7%.

($1 = 10.3975 Swedish crowns)

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