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Highlights
- H&M reports a slight decline in revenue for the third quarter, prompting concerns from analysts.
- EBIT margins significantly underperform expectations, raising doubts about profitability targets.
- An additional trading update indicates a projected sales increase for September, but analysts remain cautious.
Overview
Swedish fashion retailer H&M's third-quarter financial results prompted a negative response from analysts in the City. For the nine-month period, the company reported revenues of 172.29 billion Swedish krona, a slight decrease from 173.39 billion in the same timeframe the previous year.
Analysts at Barclays PLC (LSC:BARC) expressed that the results fell significantly short of consensus expectations, attributing the underperformance to weaker top-line growth, negative foreign exchange movements, and a one-off charge. Although H&M may have benefitted from favorable currency conditions in the UK due to the strength of the pound, the lack of specific UK sales data suggests that any advantage was minimal.
Particularly concerning for analysts was the EBIT margin, which stood at 5.9%, falling 22% below Barclays' expectations. The bank indicated that achieving the previously set 10% EBIT margin target for the year now seems unattainable. Nonetheless, Barclays welcomed H&M's renewed focus on driving top-line growth.
In an effort to address the disappointing results, H&M provided a monthly trading update for September, projecting an 11% sales increase compared to the same month last year. This boost is attributed to enhancements in existing stores, new digital initiatives, and the launch of the autumn collection.
However, analysts at Deutsche Bank viewed this guidance with skepticism, noting that it fell short of their 12% target for September. They emphasized the need for clarity on whether the reported increase stems from underlying business improvements or simply favorable comparisons to last year. The analysts pointed out that the effectiveness of new product ranges would be critical to H&M’s investment case, though it remains too early to draw definitive conclusions on their impact.
