PARIS — H&M expects it will be trickier than anticipated to meet its full-year operating margin targets due to weak June sales, an increase in purchasing costs and currency headwinds.
The Swedish fashion giant is targeting an operating margin of 10 percent this year, compared with 6.2 percent in 2023, as it seeks to turn around its fortunes.
Despite a significant uptick in its second-quarter profits, and 3 percent sales growth in both reported terms and local currencies, the firm will be more reliant than expected on boosting sales in the second half of the year, chief executive officer Daniel Ervér told analysts and reporters in a conference call Thursday.
H&M will now need sales performance at the upper end of its previous guidance — in the midsingle digits — in order to meet its profitability targets, the executive said.
“We’ve had four strong months of sales growth, which gives us more confidence in the long-term ambition to achieve the 10 percent target,” Ervér said. “We recognize that some…external factors…have turned more negative than we thought a quarter ago for the second half of the year.”
These include increased cotton prices and air freight, for instance, as well as the weakness of the Swedish kronor against the euro, not to mention weak consumer sentiment and cost-of-living concerns in many of H&M’s biggest markets.
Ervér acknowledged that the retailer may need to implement markdowns in the second half to draw consumers in.
Since Ervér stepped into the CEO role in January, he has implemented a range of initiatives aimed at making H&M’s collections and stores more attractive and reducing lead times to better react to trends, as well as doubling down on costs.
While shorter lead times are expected to help the retailer stay closer to the reality of the market, it also means it is more subject to fluctuations in the cost of raw materials and shipping, for instance.
The company said sales in June were expected to decrease 6 percent in local currencies due to strong comparisons with last year and unstable weather in key markets in Europe, which impacted purchasing, although signs in the latter part of June have been encouraging since weather improved, the executive said.
H&M has struggled in the face of its nimbler rivals like Inditex and Chinese ultra-fast-fashion player Shein in recent years, and despite efforts to turn the fast-fashion behemoth around, results have been slow.
An H&M veteran who was previously head of the H&M brand, Ervér took on the role of group CEO after the surprise departure of Helena Helmersson, who had held the role since 2020.
Ervér has pledged he will work to make the retailer more attractive to consumers, focusing largely on the core H&M brand, particularly its women’s and kids’ collections, and on upgrading the retailer’s image while homing in on value. “The number-one priority is product and assortment,” he said.
The company’s design team is key to this, he highlighted. “We have in-house one of the fashion industry’s largest design teams that has created amazing collections for this autumn,” Ervér said.
He has been working to remove layers in the organization so designers are able to be closer to trends and work more closely with suppliers going forward. “That’s something we’ve implemented over the last six months with very good results,” he said.
The retailer said customer reaction to its recent offering, including the H&M Studio collection and Cos Atelier, has been strong. In May, the H&M design team created custom looks for celebrities walking the red carpet at the Met Gala including Awkwafina, Adwoa Aboah, Paloma Elsesser and Quannah Chasinghorse.
The company has already streamlined its supply chain, implementing nearshoring and working to reduce lead times and order more in season to better predict trends and reduce inventories, which has been a key sticking point in H&M’s strategy.
Another key element of the strategy is H&M’s new store concept, which has recently been piloted in a handful of locations including New York, London, Seoul and Tokyo. These have been performing well, Ervér said.
Incorporating digital elements like smart mirrors and targeting the offer specifically to local consumers are key elements of the concept. It will be rolled out to 250 locations worldwide in the second half of the year, including Paris, Milan, Berlin, Stockholm, Hamburg and Munich, as well as New York City and London.
A new website is also in the works as H&M aims to improve the consumer experience online. Key elements of the upgrade include content aiming to keep consumers on the site for longer, as well as improved guidance on aspects like fit, in a drive to reduce return rates, which have become a thorn in the side for e-commerce players.
After trials in Denmark and Italy, the new site will go live in H&M’s biggest markets in the fall.
H&M Group’s sales totaled to 59.61 billion Swedish kronor, or $5.65 billion at current exchange, in the three months to May 31.
Operating profit jumped by 49.7 percent to 7.1 billion Swedish kronor, or $672.8 million, below forecasts. After-tax profits leaped 52 percent to 5 billion Swedish kronor, or $473.8 million.
“We achieved our best results for many years in the second quarter, showing once more the H&M group’s strength and robust financial position, with strong cash flow as well as improved profitability and sales,” Ervér stated.
The stronger sales followed a decline in the first quarter of the year, as reported. For the six months to May 31, H&M’s sales were flat in local currencies and up 1 percent in reported terms to 113.27 billion kronor, or $10.73 billion.
H&M’s shares closed down 12.9 percent at 169.40 Swedish kronor, or $15.94.
