The shares of Hennes & Mauritz (H&M) fell by 13% to SEK 169 following a weak start to the third quarter and a warning about rising raw material costs and unfavorable currency movements.
The Swedish fashion company aims for an operating margin of 10% for the 2024 fiscal year, but analysts have long doubted that this target can be achieved this year. The company is struggling with reduced consumer purchasing power, rising costs, and strong competition from low-cost online fashion retailers like Shein and its larger traditional rival Zara.
The most important prerequisite for achieving our goal is that revenue growth in the second half of the year is further strengthened compared to the increase in the second quarter," said CEO Daniel Erver.
H&M reported a margin of 11.9% in the second quarter ending in May, while analysts at Jefferies had expected 12.9%. For June, the company expects a 6% decline in sales in local currencies year-over-year, as unstable weather in many of its major markets early in the month negatively impacted sales. However, sales recovered toward the end of the month as the weather normalized.
HSBC analysts had expected flat to negative low single-digit sales growth for June due to a challenging comparison base. Last year, sales increased by 10% between June 1 and 27, aided by favorable weather conditions.
The real challenge is that the third quarter has started very poorly," said Bernstein analyst William Woods in a note to clients. "Management has also softened its tone regarding the 10% margin target and has presented its excuses early.
Woods emphasized that H&M must achieve a significant increase in sales to reach the 10% margin.
Discounts played a neutral role in the quarter compared to the previous year, with the company stating that the cost of discounts remained unchanged. However, H&M expects slightly rising discount costs in the third quarter to attract more customers and boost sales.
The most important prerequisite for achieving our goal is that the sales growth in the second half of the year continues to be strengthened," repeated Erver.
H&M is working on a cost and efficiency program that aims to save 2 billion SEK (189.1 million USD) annually to lower prices for customers and achieve the margin target. The remaining parts of the program were implemented in the first half of the year, and the costs for implementation have now been largely borne, according to the company.
The company reported a net profit of SEK 5.01 billion for the quarter ending May 31st compared to SEK 3 billion the previous year, while revenue increased by 3.5% to SEK 59.61 billion.
Analysts surveyed by FactSet had expected a net profit of 5.34 billion SEK with revenue of 59.6 billion SEK.
