H&M (HMb) shares fell by as much as 3% during Thursday trading before settling about 2% lower, despite the Swedish apparel retailer reporting better-than-expected earnings for its third fiscal quarter.

H&M Hennes & Mauritz AB reported operating profit of 6.04 billion Swedish crowns for the June-August period, up from 4.91 billion crowns in the same quarter a year earlier. The result exceeded the analyst consensus of 5.14 billion crowns compiled by LSEG.

Gross margin, the share of revenue a retailer keeps after product costs, also surpassed expectations, increasing to 54.0% from 52.9% in the prior-year period and above the 53.4% forecast. Total revenue reached 57.189 billion Swedish crowns, compared with 57.017 billion crowns in the comparable period last year.

The company’s sales outlook nevertheless weighed on the stock. H&M said September revenue is expected to rise by only 1% in local-currency terms, a measure that strips out exchange-rate effects, matching the subdued growth rate recorded during the third quarter. The figure compares with Inditex, the parent company of Zara, which reported 9% sales growth earlier this month.

The contrasting results underscore the competitive pressure facing H&M in the fast-fashion market.

H&M Targets Faster Product Turnaround

CEO Daniel Erver, who took the role in January 2024, has focused on improving operational efficiency and optimizing the supply chain. In comments to Reuters, Erver said H&M has reduced the time required to move a product from design concept to store shelves to six weeks.

The company is working to increase the share of inventory purchased through this faster process. The approach is intended to reduce the delay between identifying fashion trends and delivering products to customers. Erver said greater agility is increasingly important amid volatile weather conditions and rapidly changing consumer preferences.

Western Europe, H&M’s most important market, remained challenging. Regional sales declined 1% during the quarter. Erver attributed the weakness to consumers experiencing “a lot of pressure for a long time.” The closure of H&M’s Belgian distribution center during the period also created a headwind for regional revenue.

Tariff Refund Provided One-Time Benefit

Part of the increase in profitability came from a non-recurring refund connected to earlier US tariff payments. H&M said similar refunds are not expected in future periods. Because that boost will not repeat, the underlying pace of sales growth carries extra weight in assessing how the company’s turnaround is progressing.

Shipping expenses rose during the quarter and were identified by the company as an external headwind affecting procurement costs. Promotional markdown expenses were relatively unchanged from the previous year.

For the fourth quarter, H&M expects external cost pressures to be moderately more unfavorable than they were a year earlier. Markdown expenses as a share of revenue are expected to increase slightly, partly because the promotional period leading up to Black Friday will be extended this year. The coming quarter will therefore show whether the faster design-to-shelf model can support revenue while the company absorbs those added costs.

H&M continues to reduce its physical footprint while investing in its remaining stores. About 20% of its nearly 4,000 locations worldwide have been renovated. Digital commerce now accounts for more than 30% of total revenue, and the company plans to activate additional distribution facilities in Europe within the next year to support the channel.

Erver also discussed the European Union’s newly implemented customs duties on low-value e-commerce shipments. He had previously supported the regulations as a way to establish greater competitive parity with Shein and Temu, the low-priced online platforms that sell directly to consumers through cross-border-commerce. Erver said the changes are unlikely to have a material effect on H&M’s sales performance.

Source: Blockonomi