Shares of Swedish clothing retailer Hennes & Mauritz AB dropped after it revealed that rising energy, freight, and garment prices practically eliminated profit in the most recent quarter.
H&M reported Friday that operating income fell 87 percent to 821 billion kronor ($80 million) in the three months ending in November, considerably below analysts’ expectations. The stock dropped as much as 7.9%.
According to James Grzinic, an analyst at Jefferies, the magnitude of the fall is so great that investors will doubt chief executive officer Helena Helmersson’s projections for increased sales and profitability. Earnings were also impacted by H&M’s withdrawal from Russia and expenses associated with a plan to eliminate 1,500 jobs. The fast-fashion behemoth continues to struggle with excessive inventory levels as its profitability trails that of competitor Inditex, owner of Zara.
Compared to Inditex, which is more expensive due to the longer shipping distances, H&M purchases a larger percentage of its clothing from Asia. The business claimed it is attempting to move more purchases to nearby nations to cut costs.
The company reported that increasing expenses for electricity, freight, and clothing, as well as the impact of a strong dollar—the currency in which most clothing is sourced—have reduced profit by 3.6 billion kronor.
Following a flat fourth quarter, sales started to climb again in December and January, increasing by 5% over the crucial holiday season. The company issued a warning, noting that while discounts are marginally increasing in its first quarter and that the purchasing environment is still very bad, there are very limited chances for change later in the year. H&M stated that it made the decision not to pass along the full increase in clothing prices to customers, which also has an impact on profitability.
The business restated its goal of having an operating margin greater than 10% in fiscal 2024. The margin fell to 3.2 percent in fiscal 2022, which is less than half of the amount from the previous year.
According to CEO Helmersson’s comment, “there are very good prerequisites for 2023 to be a year of higher sales and improved profitability.”
The business stated that it anticipates closing 100 stores this year.