A drop in first-quarter profit at H&M was not enough to prevent shares in the Swedish fast fashion retailer rising by more than 12% this morning (29 March) as the group reported double-digit sales growth in the period. 

In the three months to the end of February, the group’s profit after tax amounted to SEK803m (US$86.7m), compared to SEK1.37bn in the year-ago period. H&M said profit after tax in the previous year was boosted by one-off tax income of SEK0.4m as a result of the US tax reform (Tax Cuts & Jobs Act). 

Group sales jumped by 10% to SEK51.02bn from SEK46.2bn last year. In local currencies, net sales increased by 4%. More full-price sales, lower markdowns and increased market share in many markets contributed to the gains.

During the quarter the company moved to a new online platform in Germany, holding back on sales activities in Germany during the transition process. Adjusted for Germany’s online sales, the group’s total net sales increase was 6% in local currencies. All markets are now on the new online platform. For H&M customers in the German market, this means improvements such as faster and more flexible deliveries, and better integration between physical stores and the online store, says CEO Karl-Johan Persson. 

“Sales developed well both in stores and online in many markets, including Sweden which grew by 11%, the UK by 8%, Poland by 15%, China by 16% and India by 42% in local currencies.

“The quarter’s pre-tax profit of SEK104bn was negatively affected by the drop in sales in Germany, but also by costs of around SEK250m associated mainly with the replacement of the online platform in Germany as well as continued costs relating to implemented and upcoming transitions to new logistics systems. This is having a negative effect on our margin in the short term but will have a positive effect in the longer term as it will result in a faster, more flexible and more efficient product flow.”

He notes the retailer’s transformation work is “having an effect” and will continue with full force within its strategic focus areas:

Create the best customer offering

  • Product assortment – secure the best combination of fashion, quality, price and sustainability for all the brands.
  • Physical stores – continued development of new concepts and optimisation of the store portfolio.
  • Online stores – improvements such as faster and more flexible delivery options and payments.
  • Continued integration of our physical stores and online stores to enhance the customer experience.

Fast, efficient and flexible product flow

  • The supply chain will be even faster, more flexible and more efficient.
  • Initiatives within advanced data analytics and AI.

Investments in infrastructure – our tech foundation

  • Continued investments in the tech foundation including robust scalable platforms that enable faster development of various customer apps and new technologies.

Adding growth

  • Digital expansion into new markets. This year the H&M brand is launching online in Mexico and Egypt as well as on Myntra and Jabong, the largest e-commerce marketplaces in India.
  • Physical stores – a net addition of around 175 for the year. Focus on growth markets for the H&M brand.
  • Develop new concepts and business models.

“The rapid transformation of fashion retail continues and we can see that our own transformation work is taking us in the right direction, even if many challenges remain and there is still hard work to do,” Persson says. “The progress we have made in our strategic focus areas confirms that we are on the right track. Therefore we continue moving forward at full speed and we are optimistic about the future for the H&M group.”

Confidence grows as H&M’s transformation plan produces results

Kate Ormrod, lead retail analyst at GlobalData, notes H&M ended its last financial year in a better place after a decent fourth-quarter sales performance, and this trend has continued into the first quarter of the new financial year.

“The value retailer’s optimism about the future is justified, with net sales in local currencies rising 7% in March (which falls into its second-quarter period). However it will come up against tougher comparatives in the second half, and its transformation plan must continue to deliver, with rebuilding profitability crucial,” she says.

Having underinvested in online previously, Ormrod notes H&M is making up for it now with numerous initiatives, and will roll out click & collect and instore returns to more markets this year. Users in the US can now buy H&M products directly on Instagram without leaving the app. “Being part of this trial signals H&M’s intentions to become more innovative online, much needed to compete with online pureplays.”

H&M is also setting the bar on sustainability, Ormrod says. “As consumer interest in sustainability continues to grow, H&M is well placed to benefit, though widening awareness of its endeavours instore and online, helping to educate shoppers at the same time, is a must.”

The retailer recently introduced three new sustainable materials, including natural leather alternative Piñatex, into the spring 2019 collection from its eco-friendly Conscious Exclusive line.