PARIS — A strong U.S. dollar, inflation and the ongoing impacts from the war in Ukraine reined in H&M’s sales growth in the first quarter of 2023, with sales up 3 percent in local currencies.
Excluding Russia, Ukraine and Belarus, the increase was 7 percent in local currencies.
The numbers for the group, which operates Cos, Monki, & Other Stories, Arket and Weekday as well as its core H&M brand, looked more positive in Swedish kronor. Net sales were up 12 percent to 54.87 million Swedish kronor, or $5.27 billion, in the three months to Feb. 28.
“High raw materials and freight costs combined with a strong U.S. dollar had a very negative impact on purchases made for the first quarter when compared with the previous year,” the company said in a statement.
The company saw a boost in its operating profit margin to 1.3 percent, up from 0.9 in the same period last year, a positive effect of its ongoing cost-cutting measures.
The results were “stronger than expected,” said RBC analyst Richard Chamberlain following the release on Thursday morning. H&M’s shares rose 8 percent in morning trading, reflecting the positive market reaction.
“The H&M group continues to stand strong with a robust financial position, stable cash flow and a well-balanced inventory. The start of the year shows that we have taken further steps toward the goal of achieving an operating margin of 10 percent already next year,” said chief executive officer Helena Helmersson, noting sales in local currencies are up 4 percent year-on-year in March so far.
Western Europe was the company’s strongest market, up 9 percent in local currencies in the first quarter, while the war in Ukraine dragged down the Eastern European region, with sales falling 30 percent. Revenues in the Americas were up 9 percent in local currencies, while Asia was flat.
China remains elusive for the fast fashion behemoth. “We’re still not where we want to be,” Helmersson said in a call with analysts following the release. She said the group is adjusting its offering to find the right customer and product mix to gain relevancy in the highly competitive country, but progress is moving “rather slowly, though it is a very important market for us.”
The U.S. has proved particularly resilient despite economic headwinds. Worries about inflation “seem to be a little bit less overall than Europe,” Helmersson said.
H&M sees potential in second-hand sales, and will fully integrate its secondhand platform Sellpy at the group level going forward.
The platform, which handles the entire process including pickup, listing, selling and shipping, launched in Sweden in 2014, and expanded across Europe over the last two years. H&M Group’s head of investor relations Nils Vinge said the growth rate of the platform is “about 60 percent in the last year” and the company sees tremendous potential in markets such as Germany, where it has grown in recognition and popularity.
Still, the platform is not yet profitable. “It is on a break-even level, which is unique within this space,” Vinge said. Sellpy will benefit from more integration with the company’s logistics in the long-term.
H&M noted that around 70 percent of total sales take place in physical stores with 30 percent online. Sales in stores increased in the quarter despite there being 7 percent fewer locations than in the previous year due to closures, particularly in Western Europe and Asia.
H&M will start charging for online returns in 10 to 15 markets after testing in two markets last quarter. “We will see how that progresses and how customers will react, but we are moving on it,” Helmersson said.
Self-service checkouts have been widely accepted across Europe. They are in about 10 percent of stores and will rapidly roll that service out in new markets the coming quarter. As the company focuses on omnichannel sales, self-service checkouts are “a very appreciated way of ensuring a friction-free transaction,” Vinge said.
The group has worked to reduce inventory, holding 16 percent less items, and create a better product mix. That has led to fewer discounts, as well as reduced shipping and logistics costs, Vinge said.
Pressed on prices, the executives said they held back from overarching increases in the first quarter and are continuing to explore price elasticity “product by product” in each market and keeping an eye on competitors. Inditex’s Zara has raised prices roughly 5 percent since last fall, but continued to see record results over the last two quarters.
Keeping prices low and steady “helped to offset headwinds from the [strong U.S. dollar] and higher raw materials and freight costs,” said RBC’s Chamberlain, as the company avoided markdowns over the holiday season.
However, Vinge indicated the group is upping prices at its Cos brand, which will continue to position itself as a high-end brand moving forward.
The company does not break down sales by brand, but noted that revenues across the portfolio, excluding H&M, were up 19 percent in Swedish kronor and 11 percent in local currencies in the first quarter.
Moving production closer to its markets, so far in Europe and Asia, is offsetting shipping costs. The company is continuing to explore more nearshoring options around the globe, particularly in the Americas.
H&M’s loyalty membership program boasts about 200 million members worldwide, and continues to progress adding new subscribers, Helmersson said.
Gross profit totaled 25.88 million Swedish kronor, or $2.48 billion at current exchange, up just under 1.1 percent year-on-year from 24.26 million Swedish kronor, or $2.33 billion, in the same period of 2022.
Operating profit margin ticked up to 1.3 percent, an increase from 0.9 percent in the same period last year, on operating profit of 725 million Swedish kronor, or $69.6 million at current exchange. The results were held back by increased raw materials and freight costs, higher energy costs, as well as a strong dollar, though the company sees those pressures easing going forward.
The group is launching in new markets, including its first H&M store in Albania earlier this month, and online in Ecuador and South Africa. Cos, Arket, Monki and & Other Stories are also expanding in Mexico, Estonia, Hong Kong and Australia.
H&M plans to close 200 stores around the world but open in 100 new locations in 2023. The group is moving on its plan to renegotiate leases in key markets, but said it continues to be penalized by a weak Swedish kronor.
Helmersson added that the company faced continued challenges due to economic and political headwinds around the world. “At the same time, we are confident that we have the ability to adapt to the new conditions that will strengthen our competitive advantages further, we have a well-positioned customer offering and are fully focused on meeting customers ever increasing expectations of good value,” she said.