Shares in fashion retailer H&M jump after Q1 profit surprise

STOCKHOLM: Shares in H&M (HMb.ST) jumped 15% to a 10-month high after the fashion retailer reported a surprise operating profit for its first quarter due to a one-off gain and as cost-cutting measures started to bear fruit despite consumers curbing spending.

While H&M showed signs of bringing its costs under control, it still struggled to compete with major rival Inditex (ITX.MC), owner of Zara and other brands, as well as rapidly expanding fast fashion online retailers such as SHEIN and Temu.

"The value for money that we provide is really, really important for customers right now," CEO Helena Helmersson told Reuters in an interview.

Unusually cold weather in many of the Swedish retailer's key markets held shoppers back from buying spring clothing, the company said, denting its March sales figures.

Still, H&M shares hit their highest level since May last year - a move traders said was amplified by short positions on the stock.

Operating profit in the company's fiscal first quarter was 725 million Swedish crowns ($69.73 million) against 458 million crowns a year earlier. That was largely thanks to a one-off 1.1 billion crown earnings boost from a re-valuation of its majority stake in second-hand resale platform Sellpy.

H&M said Sellpy, in which it still holds a 79.84% stake, is now part of the group.

"Now at a time when consumers really ask for more and more second-hand, we came to a point where it made sense to do that consolidation. We also see quite some synergies," Helmersson said, adding that H&M does not plan to fully acquire Sellpy.

H&M's operating profit margin was 1.3%, up from 0.9% a year earlier. Helmersson said the company was making progress towards its goal of a 10% operating margin next year, a target analysts at Credit Suisse said would be "very challenging" to reach.

CHINA STILL COMPLEX

China remained a difficult market for H&M, which was hit by boycotts in 2021 and kicked off Alibaba's (9988.HK) Tmall e-commerce site after saying it would not source cotton from the Xinjiang region over concerns about human rights abuses.

"Customers can access us on TMall again, but overall we are still in a complex situation, we are in dialogue with different stakeholders," Helmersson said, adding things were going "step by step in the right direction".

Net sales for March are expected to increase by 4% in local currencies compared with the same period last year, H&M said. That's a slight acceleration after sales for the first quarter were up 3% from last year, but lags the competition.

"Performance was weighed by weather and could, therefore, be recovered as warmer temperatures land, but of course this result is in stark contrast to the current trading reported by Inditex," JPMorgan analyst Georgina Johanan said.

The end of 2023 looks more promising for H&M's earnings, when savings from its cost-cutting programme that is slashing 1,500 jobs are expected to kick in.