H&M Group Impacted by Investments, External Factors in Q2

Updated 2:03 p.m. ET on June 26

PARIS — With a smaller store footprint, increased marketing investment and other initiatives to boosts its core womenswear category, H&M Group said it was beginning to see early signs of success in its turnaround strategy as it released second-quarter results Thursday morning.

The retailer slightly outperformed analysts’ expectations and the market rewarded its efforts, sending H&M’s shares up 3.7 percent to end the day at 134.60 Swedish kronor.

“Our plan to focus on an elevated product offering and upgraded store experience and a strengthened brand is generating important progress across our business,” said H&M chief executive officer Daniel Ervér during a conference call with analysts and journalists. 

In womenswear — which has been the core of its focus as H&M seeks to become more attractive to consumers once more — as well as its sportswear offering H&M Move and online, the Swedish fast-fashion retailer has seen gains. But the CEO did admit that more progress is needed in the men’s and children’s categories.

“Our collections are more current, they are more on trend, more fashionable and the customer reception has been strong throughout this quarter as well as throughout the first half year,” Ervér said.

“H&M feels more relevant again and feels more exciting….It’s a long-term journey to build back that, before we will see substantial financial results. We are monitoring closely what makes the biggest difference…then we put more emphasis and accelerate,” he said.

With closures of underperforming stores — H&M has reduced its store count by 4 percent, notably by shuttering Monki doors, over the past year — the retailer said like-for-like sales were up 3 percent for the quarter, driven especially by its enhanced focus on womenswear and marketing initiatives to enhance its fashion-forward positioning.

Overall, H&M’s sales grew 1 percent in local currencies for the three months ended May 31. On a reported basis, the company registered second-quarter net sales of 56.71 billion Swedish kronor, or $5.96 billion at current exchange, down 4.9 percent year-on-year, largely due to a stronger Swedish kronor.

“Womenswear is proving to be a relative bright spot for H&M. The brand’s decision to zero in on fashion-conscious female shoppers appears to be paying off, with more clarity in messaging and stronger alignment between product and positioning,” wrote Third Bridge analyst Yanmei Tang in a research note. “However, this success has yet to extend to men’s and children’s lines.”

Analysts warned the retailer will have its work cut out in the coming months, and geopolitical uncertainty as well as weak consumer sentiment may make ongoing improvements tough, especially given that executives said they anticipated potentially higher markdowns during the third-quarter given consumers’ greater price sensitivity. 

“In times of high uncertainty, consumers are particularly price sensitive. We are closely following the macroeconomic as well as geopolitical developments,” Ervér said.

He also said the company is closely watching the competitive landscape in the U.S., where certain competitors have started increasing prices in the face of potential tariffs.

For the current quarter so far, the company said it has seen gains, with sales in local currencies expected to be up 3 percent in June despite a negative calendar effect.

But Third Bridge’s Tang said H&M continues to lag its peers. “Although H&M has increased its marketing budget, it has not yet seen a meaningful return. Zara continues to outperform by staying lean and sharply focused on platforms like social media and influencer-driven content.”

“H&M managed to print a slight beat against lowered expectations for the second quarter, largely on a slightly better gross margin and decent [operating expense] control,” wrote Deutsche Bank analyst Adam Cochrane in a research note. “The main issue in our view is the lack of top line sales momentum in the second quarter and into June. The commentary that consumers are having to be enticed to purchase with greater promotions is not good news for the H&M brand elevation and focus on fashionability. This suggests to us that more of the gross margin gains will have to be invested to support revenue growth.”

The retailer’s executives lauded sequential improvements in a number of areas quarter-on-quarter, including gross margin and operating profit, as well as inventory management. H&M’s inventory grew 1 percent in the three months to May, compared with 11 percent in the first quarter.

Looking ahead, the retailer anticipates that the external factors that negatively impacted its purchasing through the first half are turning positive for the latter part of the year.

H&M Group’s second-quarter operating profits were down 16 percent to 5.91 billion Swedish kronor, or $621.1 million at constant currency, a decline it attributed to lower gross margin and currency translation effects. This represented an operating margin of 10.4 percent, versus 11.9 percent a year ago.

H&M said margins were negatively impacted by external factors like the more expensive U.S. dollar and high freight costs, with higher purchasing costs for the second quarter, as well as ongoing investments in improving its offering for consumers.

These were sequential improvements on business in the first quarter, and the retailer said it had tightened inventory significantly quarter-on-quarter.

Ervér addressed the challenges. “Some measures have a faster impact than others, but the direction is clear and during the year we continue to implement improvements in other parts of the business,” he said. “The positive development in important areas such as online, H&M womenswear and H&M Move, as well as continued focus on good cost control, will contribute to a profitable sales development.”

For the first half, sales in local currencies were up 1 percent. In reported terms for the six-month period, net revenues dipped 1 percent, to 112 billion Swedish kronor, or $11.77 billion. Operating profit dropped a massive 22 percent, to 7.12 billion Swedish kronor or $748.3 million, representing an operating margin of 6.4 percent.

While H&M has been closing unprofitable stores, it is also continuing to expand, and has high hopes for its entry into the Brazilian market in the second half, with four locations and e-commerce set to open in what the company sees as a high-potential market. In total, H&M plans to open 80 new stores this year.

Store upgrades in key locations are also in the cards, with a better assortment and increased capabilities like self-checkout. “One of our key priorities for 2025 remains to elevate the shopping experience, both in the physical store as well as online,” Ervér said. The retailer said the impact of its reduced store footprint on sales would lessen in the latter part of the year.