H&M Hennes Mauritz

PARIS Offering investors hope for better days ahead, Hennes & Mauritz AB said it expects to post a profit for the third quarter as business bounced back faster than it had expected.

“As a result of appreciated collections together with rapid and decisive actions, the H&M Group’s recovery is better than expected,” said the Swedish fast-fashion retailer, which owns Cos, Monki and Weekday, as well as its namesake chain, in a statement.

Net sales for the three months ending Aug. 31 were down 19 percent to 50.87 billion Swedish kronor, or $5.81 billion, a decline of 16 percent in local currencies.

The retailer began the quarter with 900 stores still closed out of a network of 5,000; by the end of the period, 200 were shut.

H&M is forecasting third-quarter pretax profit of 2 billion Swedish kronor, which it will report on Oct. 1, thanks to more full-priced sales and strong cost-control efforts, according to the group.

The figure cheered investors, who sent shares higher to close up 10.47 percent, or 15.40 Swedish kronor, at 158.15 Swedish kronor.

While sales were broadly in line with expectations, the profit figure was a “significant beat,” noted analysts at Berenberg Retail and Bernstein. While further details of the results over the quarter will help explain the performance, and whether it may have been influenced by one-off figures, consensus estimates will likely be increased, suggested Berenberg.

The announced profit figure points to a 3.9 percent margin, well above previous estimates, according to analysts at Bernstein, who had projected no margin.

Analysts singled out stronger full-price sales — a crucial issue for H&M, which has clawed its way out of discounting spirals of recent years thanks to an overhaul that entailed refocusing its offer. The coronavirus crisis hit just as the group had started to see turnaround efforts pay off.

Richard Chamberlain of RBC Europe noted stronger full-price sales with lower markdowns as well as expectation-beating cost control contributed to the quarterly performance.

“We think this reflects consumers’ willingness to shop more at full price and to H&M’s relatively flexible cost base,” said Chamberlain of RBC Europe.

“We think most of this can be sustained going forward,” added Chamberlain, noting the results offer a “positive read” for the apparel sector in general, citing Zara owner Inditex, Next Plc. and Primark owner Associated British Foods.

Inditex releases first-half results Wednesday.

“In addition, we think H&M has been helped by its relatively flexible labor force, tight cost control and relatively flexible rental estate, with the majority of leases turnover related,” said the analyst.

Fast fashion is not entirely out of the woods, however, analysts suggested.

Short-term trading conditions still look challenging, with a likely moderate pace of recovery, according to Chamberlain.

The analyst expects H&M’s inventory level to be higher, year-over-year at the end of the third quarter, but of a “generally good” composition.

The retailer reported a loss in the first half as the coronavirus crisis weighed heavily on business, and has said it will focus on digital channels and speed up store closures. In June, the group projected a net decrease of around 40 locations.

Inditex, which enjoys a lead on rivals in the digital sphere, aims to push further ahead. It plans to invest nearly 3 billion euros over the next two years in beefing up its digital platforms and integrating store and online stock. The Spanish retailer is also sticking to its strategy of culling smaller stores to focus on larger, spruced-up flagships, outfitted with state-of-the-art garment tracking technology.

The lockdown period boosted online business at Inditex and H&M. Inditex expects the online channel to account for more than a quarter of total sales in 2022, compared to 14 percent last year.

Short-term demand remains uncertain, according to analysts at HSBC, who recently lowered their annual estimates for Inditex revenue, citing likely lower third quarter growth for the Spanish retailer to reflect a slower recovery in Southern Europe and in city centers, as seen with H&M and Primark.

Measures taken by management along with recovery in demand from 2022 support HSBC’s higher-than-consensus estimates for Inditex, the analysts said. However, Inditex’s centralized operating model and short lead time supply chain gives it a structural advantage on inventory risk compared to the rest of the sector, noted HSBC.

“We also expect the acceleration of Inditex’s long-term strategy, to develop a fully integrated global store and online operating model, to drive a faster-than-expected recovery in earnings,” from 2022, added HSBC, noting the Spanish retailer’s planned digital investments of 40 percent of total capital expenditure along with the roll-out of global online capabilities.

Inditex plans to cull more than 1,000 stores over the next couple of years to further optimize its physical presence, leaving the company focused on a smaller number of larger stores with “better economics,” supporting higher group profitability, added HSBC.