STOCKHOLM – H&M, the world’s second-largest listed fashion retailer, has said it no longer expects to achieve its full-year earnings margin target, while also reporting a lower-than-expected operating profit for the June-August period. The company has faced ongoing challenges to profitability, including persistently high inflation and increased competition from its larger Spanish rival Zara, owned by Inditex. There is also the rapid ascent of Shein, a Chinese fast-fashion giant that has disrupted the retail landscape with its low prices and ultra-quick production cycles.
Shein’s aggressive rise, driven by its digital-first approach and an unparalleled ability to churn out trendy, low-cost apparel, has added significant pressure on traditional retailers like H&M. While Zara has maintained its position through brand loyalty and a strong in-store presence, Shein has captured a massive global audience, particularly younger consumers, by capitalising on social media trends and offering extreme price competitiveness. H&M, like many legacy retailers, has found itself squeezed between the two competitors.
H&M’s chief executive Daniel Erver acknowledged the challenges, stating that the company now estimates its operating margin for the year will fall short of 10 per cennt. For the first three quarters of the fiscal year, the accumulated margin stood at 7.4 per cent. The company reported an operating profit of 3.51 billion Swedish crowns (US$346 million) for the third quarter, down from 4.74 billion crowns a year earlier, and well below the 4.93 billion forecast by analysts.
The company did offer some bright spots, pointing to a strong reception for its autumn collection and a projected 11 per cent rise in sales for September compared to the same period last year. However, it remains to be seen whether this uptick can offset the broader trend of margin pressure. While Inditex reported robust sales growth for its autumn and winter collections earlier this month, benefiting from improved weather, and Britain’s Next raised its profit forecast, H&M continues to trail behind. The Swedish retailer’s shares have risen just 2.7 per cent year-to-date, significantly lagging the 33 per cent surge in Inditex’s stock.
Under Erver’s leadership, which began in late January following the abrupt resignation of his predecessor, H&M has faced growing uncertainty. The company had already warned in June that rising material costs and currency fluctuations were making its 2024 margin target harder to reach. The retailer’s full-year operating margins for 2022 and 2023 were just 3.2 and 6.2 per cent, respectively, reflecting its struggle to regain profitability in a hyper-competitive market.
The next few quarters will be crucial in determining whether H&M can regain its footing or if it is facing a more profound structural challenge in the years ahead.
