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H&M Faces Sales Setback in Q4 as Inditex Dominates, But Profit Margin Strategy Shows Promise

H&M Faces Sales Setback in Q4 as Inditex Dominates, But Profit Margin Strategy Shows Promise
Source: Reuters

H&M, the Swedish fashion giant, experienced a 4% decline in local-currency sales in the fourth quarter, marking its largest drop since the third quarter of the previous year. This setback comes as its rival, Inditex, owner of Zara, reported a robust 15% surge in local-currency sales for the nine months through October, followed by a 14% increase in the subsequent six weeks.

H&M Faces Sales Setback in Q4 as Inditex Dominates, But Profit Margin Strategy Shows Promise

Source: The Star

Shift in Seasons and Margin Focus Impact H&M’s Performance

Analysts attribute the quarterly decline to a return to colder weather in October and November, leading to a potential slowdown in sales. The figure, while below analysts’ expectations for a 3% decline, indicates an improvement from the 10% fall projected in September. H&M has been navigating challenges, particularly in the autumn/winter collections, influenced by unusually warm weather.

H&M has strategically shifted its focus towards profit margins, prioritizing higher-priced products and minimizing discounts. This approach aims to achieve an operating margin of 10% by 2024. Despite the recent sales dip, H&M’s shares have outperformed Inditex in the current year, rising approximately 56%. Investors are optimistic about the company’s ability to rebound, particularly after inflation affected its profitability.

Price Increases Boost Operating Margin, but Concerns Linger

While H&M’s cautious approach to price increases, due to its traditionally price-sensitive customer base, paid off with an operating margin of 5.9% for the first nine months of the financial year (up from 3.9% in the same period last year), some analysts express reservations. William Woods, an analyst at Bernstein, raises concerns about investors’ response if H&M continues to face negative sales growth, even with an improving margin.

H&M Faces Sales Setback in Q4 as Inditex Dominates, But Profit Margin Strategy Shows Promise

Source: CNBC

In Swedish crowns, net sales for the quarter remained relatively stable at 62.6 billion crowns ($6.10 billion), slightly below the mean forecast of 63.2 billion. As H&M looks ahead to its full-year results scheduled for release on January 31, the fashion retailer remains in a dynamic landscape, balancing the challenges of market competition, changing seasons, and its strategic shift towards maximizing profitability.

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