H&M Surges Back With Stronger Profits and Trendy Overhaul

Swedish fashion group H&M announced a better-than-expected surge in its third-quarter profit, marking a significant turnaround for the retailer. Shares in the world's second-largest listed apparel company soared by 10%, reaching their highest level in 11 months, following a substantial 40% increase in operating profit for the June-August period. This positive development comes as CEO Daniel Erver, who took the helm in January 2024, continues his efforts to enhance profitability by offering trendier styles and directly competing with fast-fashion giants like Shein and Inditex's Zara, amidst a sector grappling with disruption from U.S. tariffs.

H&M's June-August operating profit climbed to 4.91 billion Swedish crowns ($523 million), a considerable rise from 3.51 billion crowns reported a year ago. This figure comfortably surpassed the average analyst forecast of 3.68 billion crowns, according to LSEG data. The company attributed this robust performance to a stronger product mix and tighter cost control, coming after two consecutive quarters of declining earnings, signaling a successful strategic shift.

Under Erver's leadership, H&M has undergone a significant marketing overhaul, engaging pop stars such as Charli XCX and Tyla for concerts and ad campaigns to inject a more fashionable appeal into its core brand. This strategic push culminated last week in H&M staging its first catwalk show since 2018, opening London Fashion Week. Commenting on the results, Erver stated, "We are taking further steps in the right direction," reflecting confidence in the ongoing changes.

Despite the strong quarterly results, CEO Daniel Erver expressed caution regarding the U.S. market, H&M's second-largest market after Germany, accounting for 13% of group sales last year. He warned that U.S. tariffs on imports are expected to weigh more heavily on margins in the quarter through November. Erver specifically highlighted concerns about both the tariff impact on gross margins and broader consumer sentiment in the U.S., noting "a lot of movement happening" and observable price increases.

In response to potential price hikes by rivals in the U.S., H&M plans to adopt a "prudent" approach. The company intends to raise prices only where it assesses consumers are willing to pay more, while committing to keeping entry-level prices stable for sensitive items such as basic wear and children's clothing, acknowledging its customer base is generally more price-sensitive than Zara's.

Analysts at JP Morgan and Alphavalue positively viewed a 9% reduction in H&M's inventory levels, indicating that shoppers are increasingly purchasing products in season at full price rather than waiting for end-of-season sales. However, H&M anticipates a slight increase in markdowns during the fourth quarter, partly due to Black Friday falling one day earlier than usual. Sales in reported currency marginally dipped to 57.0 billion crowns from 59.0 billion, yet still exceeded the expected 56.8 billion. The company projects local-currency sales in September to remain flat compared to an unusually high figure from the previous year.

H&M continues to navigate a challenging economic landscape, facing increased pressure in recent years as consumers globally tighten their spending amidst higher living costs and general uncertainty. The group's strategies are designed to appeal to its price-sensitive demographic while adapting to evolving market conditions and competitive pressures.