H&M's Profit Struggles: Margin Target Scrapped Amid Fierce Competition & Rising Costs
H&M's Operating Margin Target for 2024 Abandoned as Q3 Profit Suffers
By Marie Mannes and Helen Reid
STOCKHOLM (Multibagger) - H&M (ST:) has scrapped its earnings margin target for 2024, citing higher discounting, increased costs, and intense competition as primary factors hampering its third-quarter operating profit. This announcement led to an 8% drop in shares for the world's second-largest listed fashion retailer.
Key Challenges Facing H&M
H&M has been grappling with several challenges, including high inflation, subdued consumer demand, and fierce competition from industry giants like Zara, owned by Inditex (BME:), and budget-friendly online fast-fashion retailer Shein.
"At present, we estimate that this year's operating margin will be lower than 10%," stated H&M's Chief Executive, Daniel Erver.
Factors Impacting Profitability
Several elements have impacted H&M's profitability:
- Closure of Afound: Costs associated with shutting down its online fashion outlet Afound.
- Currency Fluctuations: Adverse currency movements.
- Increased Discounting: Higher markdown costs over the quarter.
In June, H&M had already warned that material costs would make the 2024 target more challenging. The complete abandonment of this goal without new margin guidance puts additional pressure on Erver, who has been CEO for just eight months, to expedite the brand's turnaround.
Financial Performance
H&M's operating margin for the first three quarters stood at 7.4%, with a third-quarter margin of 5.9%. The last year H&M produced a double-digit operating margin was 2017.
Erver mentioned that H&M is strengthening its brand by Multibagger in marketing, products, and the shopping experience, expressing confidence that these efforts would boost sales and profitability.
Marketing Initiatives
H&M has been aggressively marketing its autumn/winter collection, including a high-profile London Fashion Week party featuring a performance by pop star Charli XCX. This event is part of a series of 12 events across eight cities to promote the new collection.
The autumn collection has been well received, and H&M expects September sales to rise by 11% in local currencies compared to the same period last year.
Financial Results
Operating profit for H&M's fiscal third quarter was 3.51 billion Swedish crowns ($346 million), down from 4.74 billion a year ago and below the mean forecast of 4.93 billion in an LSEG analysts' poll.
Inditex recently reported a jump in sales of its autumn and winter collection following a sluggish summer, while Britain's Next raised its profit forecast due to better-than-expected recent trading.
Share Buyback Program
H&M announced a share buyback worth 1 billion crowns from Sept. 26 to Nov. 26. Despite these efforts, H&M's shares have lagged behind Inditex's over the past years and are down 5% so far this year.
($1 = 10.1443 Swedish crowns)
Analysis for the Everyday Investor
Understanding the Key Points:
- H&M's Struggles: Higher costs, intense competition, and lower consumer demand are hurting profits.
- No Margin Target for 2024: H&M has abandoned its profit margin goal for 2024, which raises concerns about the company's future profitability.
- Strategic Moves: H&M is investing in marketing and enhancing its shopping experience to drive sales.
- Share Buyback: The company plans to buy back shares worth 1 billion crowns.
Impact on You:
- Investor Caution: If you hold H&M shares, be aware that the company is facing significant challenges, which may affect your investment's value.
- Market Dynamics: The fashion retail market is highly competitive, and companies like H&M must continually innovate and adapt to stay relevant.
- Long-term Outlook: While H&M is making efforts to improve, the lack of clear profit margin targets might indicate a longer road to recovery.
Understanding these dynamics can help you make informed decisions about your investments and better grasp how broader market trends may impact your finances.