Swedish retailer H&M scrapped on Thursday its margin target for 2024 as higher discounting, costs and fierce competition in the market hurt its operating profit in the third quarter, pulling shares of the company down.
The Swedish fashion retailer had cautioned in June that factors such as material costs made the 2024 target harder to reach, but ditching the goal with no new margin guidance for next year increases the pressure on CEO Daniel Erver to accelerate the turnaround.
H&M said a strong Swedish crown and costs related to shutting down its online fashion outlet Afound hurt profit and that the cost of markdowns had increased over the quarter.
It has also boosted marketing spending, hiring pop star Charli XCX, for example, for a London Fashion Week party launching its autumn/winter collection as part of Erver's strategy to elevate the brand.
H&M's operating margin for the first three quarters was 7.4%, with a third-quarter margin of 5.9%. Last year, H&M produced a double-digit operating margin and opened a new tab in 2017. Erver said 10% remained a long-term goal.
"The growth rates were widely expected, so it shouldn't be a huge surprise, but the margin weakness will continue to disappoint," said Bernstein analyst William Woods.
Shares in H&M dropped 8% at the open before paring losses to trade down 3.2% by 9:40 a.m. GMT.
It has struggled to compete against its bigger Spanish rival Zara, owned by Inditex, and cut-price online fast-fashion retailer Shein amid high inflation and weak consumer demand.
H&M said it would buy back shares worth 1 billion Swedish crowns ($98 million) from Sept. 26 to Nov. 26. The shares have lagged Inditex's over the past years and are down 5% this year.
Marketing blitz
Erver defended his plan, saying H&M was "raising the bar" and strengthening its brand by investing in marketing, products, and the shopping experience.
"It is an investment to create excitement around the H&M brand," he told Reuters in an interview. "We will continue this effort throughout the fourth quarter, and then we will evaluate and decide how we will play it into 2025."
H&M said its autumn collection was very well received and that it expects September sales to rise by 11% in local currencies compared with the same period last year.
The retailer has been on a marketing blitz for the collection, hosting 12 events in eight cities overall, including the London launch, to market the clothes.
H&M, which does not publish granular figures on marketing, said spending in the fourth quarter would be "a little higher" than in the third quarter.
"Charli XCX doesn't come cheap," said Woods.
H&M said the cost of markdowns would be "somewhat" higher in the fourth quarter.
"The customer is still very price sensitive," Erver said, adding that the company has to do some "tactical" discounting to attract shoppers.
Its stocks of clothing increased to 17.8% of rolling 12-month sales, up from 17.1% a year ago and 16.3% in the previous quarter, due to transport disruptions caused by insecurity in the Red Sea as well as "more aggressive" buying ahead of the autumn collection, Erver said. He added that H&M was committed to its long-term inventory goal of 12%-14% of sales.
Operating profit for the third quarter undershot analysts' forecasts, at 3.51 billion Swedish crowns against 4.74 billion a year ago.
Thursday's earnings report was only the second under Erver, a long-time company insider who took the helm in late January after the sudden resignation of his predecessor.
Its results contrasted with Inditex, which earlier this month reported a jump in sales of its autumn/winter collection after a sluggish summer, while Britain's Next raised its profit forecast on the back of better-than-expected recent trading.