H&M upbeat as Q3 shows it's on right track, despite profits dip

By

Sandra Halliday

Published
Sep 27, 2018

H&M had plenty of good news on Thursday as it reported nine-month and Q3 sales and profits, even though Q3 pre-tax profit was down more than expected. That was because of extra costs after a troubled introduction of a new logistics system that dented sales in the US, France, Italy and Belgium.

But wait, didn’t we say ‘good news’? Well yes, because apart from that blip, the company appears to be on track with Q3 showing a marked sales improvement overall compared to Q1 and Q2, plus good early results from its AI/omnichannel programs.

And investors seemed quite happy with that, the firm’s share price rising almost 12% at one point in early trading.

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The company had already previewed its Q3 sales last week saying they rose strongly, but on Thursday it filled in more detail about the quarter and the nine month-period with that detail clearly showing the more recent improvement. 

For the nine months sales rose 3%, rising to SEK178.8 billion including VAT, and excluding VAT they were SEK153.98 billion. But in local currencies, the increase was only 1%. Profit after financial items dropped to SEK11.28 billion from the prior year’s SEK15.93 billion and net profit dropped to SEK9.1 billion from SEK12.19 billion.

Q3 sales rose 9%. Including VAT they were up to SEK64.8 billion and excluding VAT to SEK55.82 billion, while they were up 4% in local currencies. Importantly too, online sales rose as much as 32% to reach SEK55.82 billion.

And that Q3 profits fall? Well, gross profit was SEK28.09 billion for a gross margin of 50.3%, which was down from 51.4%. And profit after financial items dropped to SEK4.01 billion from SEK 5.01 billion, while net profit fell to SEK3.099 billion from SEK3.837 billion.

As mentioned, the logistics issues during the spring were the cause and meant extraordinary costs of around SEK400 million in Q3. Sales in the four affected markets fell by 8% overall but sales for the other 66 markets rose by 8% in local currencies.

There was plenty of other upbeat news too with a "successful launch” of new brand Afound in Sweden, the H&M brand being “very well received in Ukraine,” plus accelerated integration of the firm’s physical and online ops globally.

And there’s more positive news to come with Cos to open online in China and on Tmall in autumn 2018. Meanwhile, Uruguay will become a new H&M store market in autumn 2018.

CEO Karl-Johan Persson was cautiously upbeat. “The rapid changes in the fashion industry are continuing and the H&M group is in an exciting transitional period,” he said. “Our transformation work has contributed to a gradual improvement in sales with increased market share in most markets [in Q3], particularly Germany, Sweden, Eastern Europe, Russia and China.

“Intensive work to correct the [logistics] problems – which have now largely been resolved – resulted in extraordinary costs. The new logistics systems are an essential part of our work to make our supply chain faster, more flexible and more efficient, and to continue the integration of stores and online.”

He said the company is “working to enhance the customer experience” and is “getting a positive response from customers to the changes that we are making both online and in stores – including in those H&M stores, where we are trying out various adjustments to our assortment, product display and shop fittings.”

Importantly, because of the positive response, it’s “now scaling up this to more stores and markets. Our improvement work is benefiting from our investments in advanced data analytics and AI in areas such as quantification, allocation, pricing and trend forecasting.”