Shares in H&M have risen after the fashion retailer reassured investors that it would not need to cut costs further to shift unsold clothing despite a bigger-than- expected 20% fall in quarterly profit.
The Swedish company reported teething problems with a new logistics system designed to improve its supply chain but said it did not expect increased discounting in the current quarter because of what it called the “quality and balance” of its inventories.
Its shares were up by around 11%, having lost nearly two thirds of their value from record highs in 2015. Many in the market have bet on the shares falling, meaning any positive news tends to prompt a strong reaction.
H&M has seen profits shrink and inventories pile up over the past couple of years as its core budget chain has lost sales to low-price rivals like Primark and online competitors such as ASOS and Zalando.
It has invested heavily in logistics and digitalisation and is reviewing its mix of stores and brands and is also working on a new H&M store concept. “The rapid changes in the fashion industry are continuing and the H&M group is in an exciting transitional period,” said CEO Karl-Johan Persson.
“Our transformation work has contributed to a gradual improvement in sales development with increased market share in most markets during the third quarter.”
However, June-August pre-tax profit for the sector’s second-biggest after Zara owner Inditex shrank 20% from a year ago to 4.01bn crowns (€388.4m) against a forecast for a 16% drop.
Markdowns increased by 0.7 percentage points, and inventories 15% to 38.7bn crowns or 19% of sales in the period, the third quarter of its financial year.
RBC analyst Richard Chamberlain saw the earnings as a mixed bag.
“We still see the risk to consensus estimates as on the downside, however H&M is working its way through some of its issues and has given more reassuring guidance on markdowns for the fourth quarter, expected at this stage to be flat year-on-year,” he said.
H&M is bringing in a new logistics system to make its supply chain faster and more efficient and better integrate its more than 4,700 stores with its website. Problems with the new logistics system in the US, France, Italy and Belgium led to extra costs of around 400m crowns and a sales drop of 8% in those markets.
However, overall sales for its other 66 markets increased by 8% in local currencies during the quarter.