H&M's quarterly sales stagnate as it feels heat of competition

H&M shares fell more than 4% in early trading after the company said June-August local-currency sales, the most closely watched figure, were "flattish" year-on-year, missing the 5% growth forecast by analysts in a Reuters poll. H&M is in the mid-market and analysts say it is being squeezed on both sides - by Zara which is appealing more to aspirational shoppers, and by fast-fashion retailer Shein and Primark which are beating it on price.

H&M reported on Friday flat sales for its most recent quarter, lagging expectations as the world's second-biggest fashion retailer struggled in the face of intense competition from Zara-owner Inditex and others. H&M shares fell more than 4% in early trading after the company said June-August local-currency sales, the most closely watched figure, were "flattish" year-on-year, missing the 5% growth forecast by analysts in a Reuters poll.

H&M is in the mid-market and analysts say it is being squeezed on both sides - by Zara which is appealing more to aspirational shoppers, and by fast-fashion retailer Shein and Primark which are beating it on price. All eyes are on the ability of H&M, which also owns Arket, Cos, Monki, & Other Stories, and Weekday, to improve its profit margins. The company said efforts to achieve its goal of a 10% operating margin in 2024 were "going in the right direction," and that it prioritised profitability during the quarter.

In a sign of that strategy, H&M has become relatively more expensive this season, RBC analysts found in a survey of UK apparel pricing published at the end of August. "Whether H&M is able to turn its margin back is most important in the near-term," said Jie Zhang, an analyst at AlphaValue.

The Swedish company's shares have gained around 50% this year as sales rose while a cost-cutting drive announced last year started to bear fruit, but intense competition has taken a toll. While H&M has struggled to pass cost increases on to shoppers through higher prices, Zara raised prices early and spent on marketing to elevate its brand, for example by working with fashion photographer Steven Meisel.

Inditex beat expectations on Wednesday with a 40% jump in half-year net profit even as it slowed the pace of price increases. Inditex's sales in constant currencies increased 14% between Aug. 1 and Sept. 11, but fell short of analysts' expectations for an 18% rise in a sign that the heatwave in Europe had dented demand for autumn and winter clothes.

H&M's net sales rose 6% to 60.9 billion Swedish crowns ($5.45 billion), lagging the 63.5 billion expected by analysts. Excluding its Russia, Belarus and Ukraine operations, H&M's sales rose 8% measured in Swedish crowns. H&M opened its Russia stores from August to November last year to sell stock before closing them permanently.

H&M has announced that it will begin reopening stores in Ukraine in November, after they were closed last year following Russia's invasion. ($1 = 11.1635 Swedish crowns)