By Marie Mannes
STOCKHOLM (Reuters) -Fashion retailer H&M's shares jumped more than 17% on Thursday after its second-quarter profit beat estimates as cost-cutting measures started to bear fruit and its summer collection benefited from warmer weather in Europe.
H&M, which has lagged Zara owner Inditex (BME:ITX), has sought to raise its fashion appeal and boost its higher-priced brands, targeting shoppers less vulnerable to the rising cost of living as fast-fashion giant Shein takes market share with less expensive clothes.
Shares in the world's second-biggest fashion retailer surged to their highest level since January 2022 and were on track for their biggest ever single-day gain. The stock, which is highly shorted or has high bets against it, was trading at 185 Swedish crowns by 1500 GMT.
The share price jump was likely helped by a "short squeeze", said Adam Cochrane, analyst at Deutsche Bank (ETR:DBKGn) Research, adding that "investors are reassessing the likelihood of [H&M] reaching management's 10% EBIT margin target given the better cost control evidenced in the quarter."
H&M increased sales in many markets despite a squeeze on consumers' spending ability and "unfavourable" weather, CEO Helena Helmersson said, adding that its summer collection had got off to a good start as temperatures rose across northern Europe.
Sales from June 1-27 were up 10% from a year earlier, a good sign for the start of H&M's third quarter. The H&M womenswear collection, as well as strong performance from the Cos and Arket brands, drove the boost in sales, Helmersson said.
The stronger-than-expected profit helped investors digest a weaker margin of 8.2% for the second quarter, down from 9.2% a year earlier. H&M aims for an operating margin of 10% by 2024.
H&M blamed high raw material and freight costs for the lower margin, but said these factors had "pivoted from being negative to being positive", indicating easing inflationary pressure, which Helmersson said could lead to it lowering prices.
"Of course there is the potential to reduce some of the prices to make sure that we are really competitive, but also we are always keeping track of taking steps towards the profitability target that we have for 2024," she said on a call with analysts.
In China, where H&M has been struggling, Helmersson stuck to the same message as earlier this year, saying the company is not yet at the level it wants to be, but things are moving in the right direction.
DROP IN INVENTORY LEVEL SURPRISES
A sharp drop in inventory levels was a positive surprise, according to Cedric Rossi, next-gen consumer analyst at Bryan Garnier in Paris.
"I was really surprised to see that, without any higher promotional activity - because markdowns were in line with last year - H&M decreased its inventory position," Rossi said.
H&M's inventory was at 16.7% of rolling 12-month sales on May 31, down from 19.2% a year earlier.
Last year it announced layoffs and other cost cuts aimed at reducing costs by 2 billion Swedish crowns.
The cost cutting helped operating profit in the second quarter hit 4.74 billion Swedish crowns ($438.6 million), down from 4.98 billion a year earlier but well above the 4.07 billion forecast by analysts in a Refinitiv poll.
H&M, which closed a total of 303 stores across its brands in the year to May 31, said its new store openings would mainly be in "growth markets" while it would close stores mainly in established markets.
($1 = 10.8084 Swedish crowns)