Swedish apparel retailer H & M Hennes & Mauritz AB officially retreated from its coveted 10% operating margin target for full-year 2024 on Thursday, dealing a blow to investor confidence in its corporate turnaround. Reporting third-quarter earnings in Stockholm, the world's second-largest listed fashion retailer disclosed that operating profit fell to 3.51 billion Swedish crowns ($345 million) from 4.74 billion crowns a year earlier, sharply missing consensus analyst forecasts of 4.33 billion crowns.
Net sales in the June-August quarter slipped by 3% in local currency terms to 59.01 billion kronor. CEO Daniel Ervér, who took over in January, explained that an abnormally long and hot summer across key European markets in late August and September severely disrupted the start of the autumn fashion shopping season, leaving consumers uninterested in coats, knitwear, and heavier garments.
Unfavorable Weather and Rising Material Costs Compress Quarterly Profitability
In addition to weather-related headwinds, H&M was hit by elevated sourcing costs stemming from higher shipping freight rates around Africa due to Red Sea maritime tensions, as well as the lagged impact of a stronger US dollar earlier in the year. Marketing expenses also surged as the group kicked off a major rebranding blitz featuring pop star Charli XCX and supermodels to elevate its brand appeal.
H&M finds itself squeezed in a brutal two-front retail battle. At the lower price tiers, Chinese-founded ultra-fast fashion disruptor Shein continues to capture market share with rapid algorithms and rock-bottom prices. Meanwhile, at the higher-margin fashion-forward tier, Zara's parent company Inditex posted record quarterly profits, buoyed by superior supply chain agility that allows it to react faster to seasonal shifts.
“At present we assess that the conditions for achieving that goal this year have become considerably more difficult, but our long-term profitability ambition remains firmly in place.”
Fierce Competition from Shein and Zara Tests Long-Term Turnaround
Stockholm market reaction was swift and punishing, with H&M shares tumbling more than 8% in early Nordic trading. Analysts noted that operating margin for the third quarter shriveled to 5.9% compared to 7.8% a year ago, making an annual leap to double-digit margins mathematically unattainable with only one quarter remaining in the fiscal year.
Despite the setback, Ervér reiterated that H&M's structural investments in store refurbishment, automated logistics, and enhanced digital offerings are gaining traction. September sales are projected to grow by 11% in local currencies as cooler autumn weather finally takes hold, although significant promotional markdowns may be required to clear leftover summer inventory.
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