Fashion retailer H&M's profits tumble as costs bite

© Reuters. A woman enters a store of the Swedish fashion retailer H&M at a shopping mall in Beijing, China March 24, 2021. REUTERS/Florence Lo

By Marie Mannes and Anna Ringstrom

STOCKHOLM (Reuters) -Fashion retailer H&M's profits were almost wiped out in the September-November quarter by soaring costs, which the Swedish company held back from passing on in full to cash-strapped customers.

The world's second biggest fashion chain, which raised some prices, will continue with this pricing strategy even though it will not fully compensate for the higher costs, such as for energy, transport and raw materials.

Chief Executive Helena Helmersson said: "Rather than passing on the full cost to our customers, we chose to strengthen our market position further."

Helmersson, speaking at a news conference on Friday, said the group would keep raising prices in some categories to a varying extent in different markets to partially make up for continued high costs.

"It's a very dynamic pricing strategy," she told Reuters in an interview. "It will still be very challenging in the first quarter of 2023. And then of course we need to increase prices, but not to cover the whole."

The retailer said its exit from Russia and the financial impact of a cost-cutting drive announced last year also contributed to the fall in profit.

The world's second-biggest fashion retailer reported a profit before tax for the period of 463 million Swedish crowns ($44.94 million), against a year-earlier 6.0 billion. Analyst polled by Refinitiv had forecast a fall to 3.5 billion crowns.

H&M's shares were down by 6% at 1222 GMT, capping a year-to-date rise to 10%.

Having already reported that sales in the quarter were flat measured in local currencies, H&M said on Friday the sales from Dec. 1 to Jan. 25 - the start of its fiscal first quarter - were up 5%.

Helmersson told the news conference chances were good that sales and profitability would improve in 2023, primarily towards the end of the year.

The group in September launched a drive to cut costs by 2 billion crowns annually, with savings expected to start showing from the second half of 2023. It flagged in November it would cut around 1,500 jobs as part of the programme.

H&M gradually closed its stores across Russia last year, and decided to exit the market.

The hit to fourth-quarter profit from winding down in Russia, higher costs for energy, freight and raw materials, currency translation effects and the previously flagged restructuring charge totalled 5 billion crowns.

"Gross margins were weaker than expected," analysts at Credit Suisse said in a note to clients.

"The company has clearly decided not to pass on the full increase in input costs," they said, adding that sales so far in the current quarter were strong - as expected given colder December weather across Europe.

H&M has struggled to keep up with bigger rival Inditex (BME:ITX), the owner of Zara.

Inditex in December reported a jump in profit for the nine months through October but said sales growth slowed in the final three months of that period due to the weakening consumer environment. It will report its next quarterly results in March.

Britain's Superdry on Friday cut its profit forecast for this year as its wholesale business underperformed.

H&M proposed an unchanged dividend of 6.50 crowns per share.

($1 = 10.3029 Swedish crowns)