H&M shares jump 16% as it ekes out a profit

Hennes & Mauritz shares jumped on Thursday as the world’s second-biggest fashion retailer eked out a surprise profit and cut excess stock to the lowest level in years.

H&M, which has struggled for years with weak profitability, high inventory levels and unflattering comparisons to Zara owner Inditex, said it was making progress on its cost-cutting programme and expected increases in raw material prices to ease towards the end of the year.

Operating profit at the Swedish group in the three months to the end of February rose to SKr725mn from SKr425mn a year earlier. While this included a SKr1bn gain from revaluing its stake in second-hand chain Sellpy, the results were well ahead of analyst expectations of a loss of SKr1.2bn.

“It’s still pretty tough out there, but we see positive developments,” chief executive Helena Helmersson told the Financial Times.

Investors responded with relief, with shares in the company up 16 per cent in early afternoon trading in Stockholm to their highest level in 12 months.

Talking about H&M’s goal of achieving an operating profit margin of 10 per cent by next year — up from 1.3 per cent in the first quarter — Helmersson said: “of course it’s a tough goal but we are really committed to reach it, and we do see this quarter is one step in that direction.”

Inventory levels dropped one percentage point to 17.9 per cent of the previous year’s sales, the company’s lowest rate in almost three years. High stock levels have long been a problem for H&M, which targets 12-14 per cent of sales for inventory, as it leads to fewer full-price sales.

Analysts said the surge in the share price, which is now about 40 per cent higher than the 19-year low reached in September, was due to covering of short positions as sentiment was negative on H&M heading into Thursday’s results.

Sales in the first quarter increased by 12 per cent but just 3 per cent in local currencies. In March, the first month of H&M’s second quarter, sales increased by 4 per cent in local currencies as the start of the spring season was delayed in much of northern Europe due to unseasonably cold weather.

Helmersson said consumers were reacting positively to H&M’s value-for-money proposition in the current uncertain economic climate, and that the positive effects of its cost-cutting programme would become more apparent throughout the year.