(Bloomberg) -- Hennes & Mauritz AB shares dropped after the Swedish clothing retailer said it’s unlikely to hit a key profit target this year following a washed-out summer in Europe.
Chief Executive Officer Daniel Erver said that a pick-up in sales since the cold weather in June won’t be enough to help it achieve a 10% operating profit margin goal. He also pointed to the continued high cost of living for consumers.
Operating profit for the third quarter came in at 3.51 billion kronor ($350 million), below analyst estimates, even though H&M said it had maintained good cost control during the period.
H&M shares fell as much as 8.6% in early trading Thursday in Stockholm. They recovered slightly but are still now down for the year.
The results come amid a strategy shift for the Stockholm-based company under Erver who took over after Helena Helmersson stepped down abruptly in January. Erver’s plan is to improve the clothing products it’s selling and the look and feel of H&M’s stores and marketing efforts in a bid to attract cash-conscious shoppers.
H&M will no longer prioritize “things that don’t strengthen our brands or contribute to our sales and profitability,” Erver said in a statement. The H&M veteran, who started as a summer trainee in 2005, needs to improve H&M’s competitiveness against key rival Inditex SA, whose shares surged earlier this month after it said its third quarter was off to a strong start.
H&M is improving its supply chain so that it can ship popular items — such as clothes aimed at fashion-conscious women — more swiftly, Erver said in an interview with Bloomberg. That will mean “we can go from product idea to shelf in six weeks or react quickly if our products sell well,” he added.
Gen Z
H&M is also facing increasing competition from Chinese upstart Shein and has been recruiting celebrities popular with Gen Z such as Charli XCX and Lila Moss fronting the fall-winter 2024 collection in a bid to target a demographic it’s struggled to win over.
Younger consumers aren’t the only people H&M needs to appeal to. In August, analysts at Citigroup Inc. advised clients to sell shares in the Swedish firm and buy those in Zara-owner Inditex.
Net sales in the quarter were down a touch at 59.01 billion kronor and also slightly below analysts’ expectations. But sales in September are expected to increase by 11% in local currencies on a year earlier, H&M said.
H&M’s surging shares in the run-up to today’s results reflected optimism about strong sales, as European temperatures clearly turned cold for the autumn-winter season, according to James Grzinic, a retail analyst at Jefferies. However, he added: “What is rather more critical today is a 24% miss in third quarter earnings before interest and tax.”
“Guidance for negative general merchandise impacts from markdowns and external factors in the fourth quarter, combined with an evident step up in cost investments, will likely lead to considerable consensus downgrades today,” he said.
(Updates with comments from CEO interview, chart.)
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