H&M's Profits Take a Hit from Rising Costs and Pulling Out of Russia

H&M's stock is down 5.18%. It reported a sharp drop in annual profit as rising costs and its decision to exit Russia hampered the company's efforts to rebound from the Covid-19 pandemic.

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H&M reported a net profit of 3.6 billion Swedish kronor for the 12 months ending Nov. 30, a 68% decline from the previous year.

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H&M's profit fell sharply despite a rise in sales, as the company battled cost inflation throughout 2022. A one-time accounting charge of 2.6 billion kronor related to the closure of its operations in Russia and to a cost-cutting program announced in November also hit profit, leading the company to report a loss for the fourth quarter.
Annual sales rose 12% to 224 billion kronor in 2020, but were still below the 233 billion kronor reported for 2019 before the emergence of Covid-19.
H&M shares fell by around 7% in early trading on the Stockholm stock exchange.

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H&M's Chief Executive Helena Helmersson has described 2022 as a turbulent year, but said that sales so far in the new financial year have been going well. She said that while there are still some challenges from external factors, things are moving in the right direction.

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The fashion retailer pointed to a series of geopolitical and economic setbacks that dented its results, notably Russia’s invasion of Ukraine last February. That prompted H&M to close its 181 Russian stores, with analysts estimating the decision cost the company around 5% of its global sales. The war increased raw-material and logistical costs, which also contributed to inflation. The strong dollar also hurt the company, as most of its products are sourced in Asia.

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H&M's performance is much better than that of its rival fashion retailer Inditex SA, the owner of the Zara chain. Inditex recently reported a 19% rise in sales for the nine months to Oct. 31, compared with the same period in 2020, but its profit was only up 24%. This is a significant improvement over the company's prepandemic performance.

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H&M's slow recovery indicates that the company is facing some strategic problems, according to analysts. They say that H&M has few obvious opportunities for growth in an increasingly competitive fashion market.

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"Sometimes you do need to recognize that the opportunities for growth just aren't there anymore," said Simon Irwin of Credit Suisse. He forecasts that H&M's revenues will fall short of 2019 levels in 2020 and 2021. Irwin thinks the company should put more emphasis on growing its profit margin rather than sales. H&M has long-standing problems in China, having been boycotted there two years ago after raising concerns about human-rights abuses in Xinjiang. The company has never fully recovered in the Chinese market, especially with Chinese brands now presenting a strong challenge to mass-market Western rivals.

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H&M's reputation as a low-cost brand is being challenged by growing competition from rivals such as Shein and Primark, whose products are typically cheaper.
H&M has announced that it will cut 1,500 jobs in a bid to support its profit margin. This represents around 1% of the company's global head count. The company has also reduced its global store count, from a peak of 5,076 in 2019 to 4,465 in 2022, a 12% decline. Analysts said eliminating underachieving physical stores while investing in successful stores as well as growing online sales is the right approach. Yet H&M could have gone further and faster in paring back its store estate, they said. Inditex, for example, has slashed its store count by 16% since 2018.

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Despite the various challenges faced by the company, Ms. Helmersson said on Friday that H&M should see improvement in sales, profitability and inventory levels this year.

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Ms. Helmersson said that H&M is focused on a target of returning to double-digit operating margins by 2024. This is up from 3.2% last year.