Business

H&M profits fall to a tenth of last year’s level as inflation and consumer caution hit

Soaring input costs and a costly exit from Russian market have hit Swedish fashion retailer hard

People walk past the closed H&M store in a shopping centre in St Petersburg, Russia. Photograph: EPA

Anna Ringstrom
Thu Sep 29 2022 - 10:08

Swedish fashion retailer H&M launched a 2 billion krona (€181.5 million) cost savings drive on Thursday after reporting weaker-than-expected profits due to soaring input costs, slowing consumer spending and its exit from Russia, while its UK peer Next cut its forecasts amid weaker-than-expected August trading.

In Europe, where H&M does the bulk of its business, the Ukraine conflict, record energy prices and high inflation are weighing on consumer confidence, and households are cutting back on spending as they brace for tougher times.

Pretax profit in the June to August period, the Swedish group’s fiscal third quarter, fell to 689 million krona from 6.09 billion krona a year earlier. Five analysts polled by Refinitiv had on average forecast a 2.98 billion krona profit.

Shares fell more than 6.5 per cent.

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H&M said a 2.1 billion krona one-off cost for winding down its business in Russia, announced in July, accounted for only about half of the profit drop.

Earlier this month, the group reported lower-than-expected sales for the period as shoppers reined in spending in the face of soaring energy and other living costs, but said demand had improved late in the quarter.

The retailer said on Thursday a heatwave in many European markets in the summer and delays in the supply chain also weighed on sales.

Meanwhile, increased raw materials and freight prices, and a stronger US dollar, resulted in substantial cost increases for purchases of goods.

“Overall, these factors had a substantial negative impact on profit for the quarter,” CEO Helena Helmersson said. “We have chosen not to fully compensate for the increased costs, which is reflected in the gross margin.”

“We note significant margin headwinds to come, particularly given the stronger USD relative to EUR, as well as higher energy costs and a loss of high-margin Russian business,” Royal Bank of Canada analyst Richard Chamberlain said in a note to clients.

Market leader Inditex, the owner of Zara, which has been weathering the tough market conditions better than H&M, increased sales in its May-July quarter. The Spanish group’s growth, however, slowed in the August 1st-September 11th period.

H&M said its autumn collections had been well received, with sales up 7 per cent year-on-year in local currencies from September 1st-27th — the start of its fiscal fourth quarter — against a 4 per cent drop in the third quarter.

Ms Helmersson told analysts markets that had been weak in the quarter, such as central Europe, had picked up in September.

Meanwhile, British clothing retailer Next cut its profit and sales forecasts on Thursday, saying August trading was below expectations and cost-of-living pressures were set to rise in the coming months.

Next, which trades from about 500 stores and online, said it now expected full-price sales in its second half of its financial year to fall 1.5 per cent, and a full-year pretax profit of £840 million (€938 million), up 2.1 per cent versus 2021-22.

It previously forecast second-half full-price sales growth of 1 per cent and a full-year pretax profit of £860 million.

Sales in September had improved and the company may see benefits from recent government measures, it said.

The group reported a pretax profit of £401 million for the six months to July, up 16 per cent, with full-price sales up 12.4 per cent.

Wages are failing to keep pace with inflation, which reached 9.9 per cent in August, and Next’s rivals Primark, Asos and Boohoo have all warned on profit this month.

— Reuters

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