H&M profits tumble after Russia exit and soaring costs

H&M blamed high clothes prices, its exit from Russia and a cost-cutting programme for an unexpectedly large collapse in its earnings as the world’s second-largest fashion retailer’s struggles with profitability continue.

Operating profit plunged 87 per cent to SKr820mn ($80mn) in the fourth quarter to the end of November from a year earlier. Analysts expected an average of SKr3.7bn.

Shares in H&M fell 7 per cent to SKr121.94 in Friday morning trade, having lost nearly half of their value since their recent peak in April 2021.

“Our decision to wind down the business in Russia, which was an important and profitable market, has had a significant negative impact on our results,” said chief executive Helena Helmersson.

She added: “The hikes in raw materials and freight costs combined with a historically strong US dollar resulted in extensive cost increases for purchases of goods.”

The Swedish retailer, which lags behind Inditex, the Spanish owner of Zara, in both sales and profitability, launched a SKr2bn cost-cutting programme last year that included 1,500 job losses.

H&M’s sales in the fourth quarter were up 10 per cent to SKr64.4bn but were flat in local currency terms. It said sales from December 1 until January 25 had increased by 5 per cent in local currencies.

“Sales in the new financial year have started well,” said Helmersson. “The external factors are still challenging, but are moving in the right direction.”

She added: “Combined with our investments and efficiency improvements, there are very good prerequisites for 2023 to be a year of increased sales, and improved profitability.”

She reiterated H&M’s goal for next year of a double-digit operating profit margin from 3.2 per cent in 2022. Its operating margin was more than 20 per cent in 2010 but has been about half of Inditex’s for the past four years.

Its results in the fourth quarter were weighed down by an SKr836mn cost for its restructuring programme.

The Swedish retailer has struggled to match Inditex’s manufacturing flexibility and has often ended up with large amounts of garments it has had to discount.

H&M said it expected to have lower inventory in 2023 but avoided giving precise financial guidance for this year. It added that capital expenditure would increase 50 per cent to SKr10bn.

The company’s board is planning a SKr3bn share buyback for this year but will “wait to see how the company develops during the year and the authorisation will only be used if certain conditions are met”.