H&M Shows Cost Discipline as Retailer Adapts to Digital Era

Updated on
  • Second-quarter earnings beat estimates on expense control
  • Retailer trims store-opening goal as inventories surge

Cost-control is the new watchword at Hennes & Mauritz AB as the European fashion giant seeks to compensate for slowing sales growth, rising inventories and dwindling profitability.

The Swedish retailer on Thursday posted second-quarter earnings that exceeded analyst estimates, with the company’s efforts to contain expenses making the difference. Contending with a growing backlog of unsold clothing that will require greater markdowns, H&M trimmed its store-opening target and set a goal for online sales growth of at least 25 percent a year.

“The company has aggressively controlled operating costs,” Caroline Gulliver, an analyst at Jefferies, said in a note. “This is a marked change from H&M’s inability to cut like-for-like costs in the past.”

H&M’s shares were up 1.4 percent in Stockholm after initially rising as much as 5.7 percent. Investors have seen the value of their holdings dwindle as the company struggled to keep pace with competitors such as Zara owner Inditex SA, which has put a greater emphasis on e-commerce and has proved more adept at responding to shifts in consumer tastes.

“We haven’t reached our own targets in the past couple of years, that’s true,” H&M Chief Executive Officer Karl-Johan Persson said in an interview. “But we’re still growing significantly, so it’s not like it’s bad, but we had set very ambitious growth targets.”

The retailer said second-quarter operating costs rose about 8 percent from a year earlier, less than analyst estimates that mostly exceeded 10 percent. The difference probably reflected lower selling volumes and reduced long-term investments, RBC analysts said.

“Given that foreign exchange added 4 percent to the cost base and the store count is up 10 percent, we think this is impressive cost control,” Morgan Stanley’s Geoff Ruddell said in a note.

H&M reduced its store opening guidance for the year to 400 net outlets from 430, while placing greater emphasis on e-commerce. The retailer, which has online operations in 41 markets, said it will add such services in the Philippines and Cyprus this year and in India in 2018. For most analysts, that advance can’t come soon enough.

“H&M urgently needs to be a fully digital multi-channel retailer,” Raymond Jame’s Cedric Lecasble said in a note.

Online expansion helped offset an increase in inventory that H&M said it plans to clear by marking down prices this summer more than last year.

Highlights of the results included:

  • Pretax profit up 10 percent to 7.71 billion kronor ($904 million) versus 7.33 billion kronor average estimate
  • Stock-in-trade surged 27 percent in the first half
  • H&M forecast the COS brand will reach sales of about 10 billion kronor this year
  • Company plans to open first stores in Uruguay and Ukraine in 2018

— With assistance by Anna Molin

(Updates with CEO comment in fifth paragraph.)
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