Shares of H&M dropped by more than 14% on Thursday morning after the company reported a smaller-than-expected increase in second-quarter profits.
The disappointing earnings report also raised concerns about the retailer’s June sales and its ability to meet full-year profit margin targets.
Q2 profit falls short of expectations
H&M, the world’s second-largest retailer, announced an operating profit of 7.1 billion Swedish kroner ($672 million) for the March to May period.
This figure fell short of the 7.37 billion Swedish kroner anticipated by analysts, according to a poll conducted by LSEG and cited by Reuters.
Although the second-quarter result showed improvement from the 4.7 billion Swedish kroner recorded in the same period last year, it was not enough to meet market expectations.
By 9:00 a.m. London time, H&M’s stock had pared losses slightly, trading down 13%.
June sales and full-year margin target under pressure
Adding to investor concerns, H&M warned that bad weather could dampen sales in June. The company expects a 6% decline in sales for the month, compared with the same period last year, when measured in local currencies.
H&M CEO Daniel Ervér expressed doubts about achieving the company’s full-year operating margin target of 10%.
“Our goal of an operating margin of 10 percent for full-year 2024 remains in place,” Ervér said.
However, 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.
Strategic investments and competitive pressures
Despite the challenging outlook, Ervér emphasized that H&M is continuing to invest in both its online and in-store experiences.
The company plans to upgrade stores in major cities such as Paris, Milan, Berlin, Stockholm, Hamburg, and Munich, following successful upgrades in New York, London, and Tokyo.
The retailer’s challenges come amid higher living costs and a slowdown in post-pandemic spending, which have impacted both high street and luxury retail sales.
Earlier this month, Zara owner Inditex reported a slowdown in first-quarter sales compared to the previous year’s growth, although it noted an uptick in May.
Additionally, H&M faces growing competition from Chinese-founded fast fashion giant Shein, which is making inroads into European markets as it prepares for a public listing in London.
Market reaction and future outlook
The reaction to H&M’s earnings report underscores the market’s sensitivity to profit margins and sales forecasts amid ongoing economic uncertainties.
Investors will be closely monitoring H&M’s performance in the coming months, particularly in light of the company’s efforts to enhance its retail experience and navigate external challenges.
With the broader retail sector facing headwinds from economic pressures and shifting consumer behaviors, H&M’s ability to adapt and innovate will be crucial in maintaining its market position.
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