Mar 30, 2023
H&M Reports Unexpected Profit on Second-Hand Sales Platform
(Bloomberg) -- Hennes & Mauritz AB shares jumped the most in two decades as the Swedish clothing retailer made progress in reducing an inventory buildup that has plagued the company for more than six years.
The stock rose as much as 19% after the company reported inventory dropped to the lowest level in proportion to sales since 2020. That added about $3 billion to H&M’s market value.
A $4 billion pile of unsold clothes has been one of Chief Executive Officer Helena Helmersson’s largest headaches, leading the company to rely on heavy discounting. The company’s results show it kept rebates flat in the first quarter, which led to a higher-than-expected level of profitability, analysts said.
The share reaction could be related to a short squeeze, when investors who have bet against a stock suddenly buy it to close their positions. Almost 10% of H&M’s freefloat is made up of share on loan, which is an indication of short interest.
The company’s inventory stood at 17.9% of sales at the end of the quarter, down from a peak of more than 21%. H&M has been targeting a level of 12% to 14%.
“It’s hard to say the timing for that,” Helmersson said in an interview. “We keep focused on a gradual improvement.”
First-quarter profit unexpectedly rose as H&M began consolidating results from its second-hand clothing platform Sellpy. Analysts expected a loss. Sellpy helped contribute to a 1 billion kronor ($96 million) accounting gain as its assets and results are now included in H&M’s. The platform operates in 24 markets across Europe including Sweden, Germany and Austria.
Sellpy’s revenue rose 85% last year and H&M has forecast its sales to exceed 1 billion kronor in 2023. The platform, which is near break-even, is also playing an important role in how H&M plans to reach its sales and emissions targets, Helmersson said.
“Doubling turnover until 2030 and at the same time cutting carbon emissions in half, this is one way to think when it comes to that, and really progressing to develop into a circular business model,” she said.
Spanish rival Inditex SA has outperformed H&M, gaining more than 40% over the past year while the Swedish company’s stock has dropped. Earlier this month, the owner of the Zara chain announced a 29% gain in operating profit for the year through January. The company also plans to invest almost twice as much as its Swedish competitor this year.
CEO Helmersson said H&M is taking steps to reach her goal of an operating margin of 10% next year. The margin was 3.2% in fiscal 2022.
Improving profitability is a challenge as the Swedish krona is at historically low levels against the dollar. That makes it more expensive for H&M to buy garments from Asia, where prices are usually tied to the US currency.
The company said it expects buying conditions to remain very negative in the second quarter and gradually improve later in the year.
Revenue is rising 4% in March, the first month of H&M’s second quarter, adjusted for currencies. Spring collections are being well-received in markets where weather has warmed up, but the start of the season has been delayed in many countries that have been colder, the retailer said.
--With assistance from Jonas Ekblom and Joel Leon.
(Updates with share gain)
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