H&M profits miss forecast as inflation squeezes European shoppers

By Greta Rosen Fondahn and Helen Reid

STOCKHOLM, June 25 (Reuters) - Swedish fashion retailer H&M reported a smaller-than-expected profit for its second quarter on Thursday, citing weaker consumer demand and inflation aggravated by the Iran war.

It also predicted flat sales this month compared with a year ago and said efforts to cut inventory levels and be more efficient had sometimes led to stock shortages that meant it could not always take advantage of the demand that existed.

"Europe, especially western Europe, has had a more difficult quarter," CEO Daniel Erver said in an interview with Reuters.

"Consumers have had a high level of inflation over many years and with the increasing energy cost, inflation becomes even higher so we can see they have a squeezed wallet," he said, adding Germany and the UK were particularly slow.

Erver has been seeking to turn H&M around as it attempts to compete with its bigger rival Zara and with ultra-cheap online platforms like Shein, but he has struggled to boost sales, which were flat for the quarter from March to May.

H&M's shares fell 2% in early trading, underperforming the wider market.

Operating profit was unchanged year-on-year at 5.91 billion Swedish crowns ($606.5 million), against analysts' forecast of 6.38 billion in an LSEG poll.

Analysts at Barclays said H&M was making progress but the signs of brand reinvigoration needed for longer term sustainable growth in earnings were limited.

"H&M's house is in much better order – inventory efficiency has improved, operating costs are well controlled and supply chain initiatives are supporting buying terms and sourcing capabilities," they said in a note.

H&M's chief financial officer Adam Karlsson said surging polyester and cotton prices due to the Iran war had made profit margins less predictable, adding that raw material costs take six to eight months to feed through to gross margins so the impact has yet to be fully felt even though commodity prices have started coming down.

Inventory levels were down 10% from a year ago, to 34.9 billion Swedish crowns ($3.58 billion), in line with Erver's push to streamline clothing stocks in order to reduce discounting.

"While we're very happy about the improved stock efficiency... there are pockets across product types, price groups, markets, where we came in slightly short on supply in relation to demand," Erver said at a press conference.

H&M PROFIT HOLDS UP DESPITE IRAN WAR

The quarter was closely watched for H&M's resilience given the impact of the Iran war on consumer confidence and costs. Profit margins held up, with the gross margin widening to 56.6% from 55.4% a year earlier against an expected 56.5%.

H&M announced a one-off restructuring cost of 679 million crowns related to layoffs of office workers, without confirming the numbers of jobs affected. Excluding that cost, operating profit increased by 11% from a year ago.

Erver, CEO since January 2024, has been trying to draw shoppers back to H&M with trendier styles and revamped stores, spearheading marketing partnerships including a collection with pop star Charli XCX, and a collaboration with designer Stella McCartney.

Accelerating a revival of its store network, H&M said it plans to open 90 new stores and close 170 this year, up from the 80 openings and 160 closures it said it expected in March. The retailer has drastically cut store numbers since a peak in 2019, returning to its level of a decade ago.

($1 = 9.7433 Swedish crowns)

(Reporting by Greta Rosen Fondahn in Stockholm and Helen Reid in London; Editing by Anna Ringstrom, Emelia Sithole-Matarise and Barbara Lewis)