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What Sank H&M’s Profits

H&M Group took a significant end-of-year profit hit as the fast-fashion giant chose to spare customers from the wrath of rising costs.

Fourth-quarter net sales at H&M increased by 10 percent to 62.4 billion Swedish krona ($6 billion), up from 56.8 billion krona ($5.5 billion) in the year-ago period. On a constant-currency basis, net sales were flat. Excluding Russia, Belarus and Ukraine, the increase was 11 percent in krona and 2 percent on a constant-currency basis.

But the retailer took an after-tax loss of 864 million krona ($83.5 million) to close out the year, corresponding to per-share loss of 0.53 krona (5 cents) per share.

In a Nutshell: Helena Helmersson, CEO of H&M Group, attributed the losses to a variety of factors, including the retailer’s exit from Russia and Belarus, and pause in Ukraine.

“Our decision to wind down the business in Russia, which was an important and profitable market, has had a significant negative impact on our results,” Helmersson said in a statement. “The hikes in raw materials and freight costs combined with a historically strong U.S. dollar resulted in extensive cost increases for purchases of goods. Rather than passing on the full cost to our customers, we chose to strengthen our market position further. On top of this there were increased energy costs as well as a one-time charge for the cost and efficiency program that was initiated at the end of the year.”

In total, Helmersson said the combined effect of these factors amounted to a negative impact on 5 billion krona ($485.5 million) compared with the same quarter last year.

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The cost and efficiency program Helmersson referred to included approximately 1,500 employee layoffs that would provide annual savings of 2 billion krona ($194 million). The program resulted in a restructuring charge of just over 800 million krona ($77.6 million) in the fourth quarter.

“The external factors that have had a negative effect on our purchasing costs are gradually reversing and are expected to become positive for our results in the second half of 2023,” Helmersson said. “Purchasing costs are already lower for the orders being placed now compared with the same time last year.”

The company gave a preview into its 2023 first-quarter performance, which saw sales increase by 5 percent year over year on a constant-currency basis within the period Dec. 1, 2022 to Jan. 25, 2023. Excluding Russia, Belarus and Ukraine, sales increased by 9 percent in local currencies.

“Sales in the new financial year have started well. The external factors are still challenging, but are moving in the right direction,” said Helmersson. “Combined with our investments and efficiency improvements, there are very good prerequisites for 2023 to be a year of increased sales, and improved profitability. Thus, our goal of achieving a double-digit operating margin for full-year 2024 remains in place.”

Currency-adjusted inventory decreased by 3 percent compared 2021. When converted to krona, inventory amounted to 42.5 billion krona ($4.1 billion), up 14 percent from 37.3 billion krona ($3.6 billion) in the year prior. H&M Group said the composition of the inventory was “good.”

Gross margin for the fourth quarter was 49.7 percent, down approximately 550 basis points (5.5 percentage points) from the 55.2 percent gross margin last year. The external factors for purchases made for the fourth quarter were “very negative” compared with the corresponding period last year, the company said.

The full-year gross margin was 50.7 percent, down from 52.8 percent in 2021. Adjusted for the one-time expenses from the cost and efficiency program, 2022 gross margin was 50.8 percent.

Capital expenditures at H&M are planned to increase to 10 billion krona ($970 million) in 2023 from 7 billion krona last year ($678 million).

Cash flow from operating activities amounted to 24.5 billion krona ($2.4 billion). Financial net cash was 10.9 billion krona ($1.1 billion). Cash and cash equivalents plus undrawn credit facilities amounted to 39.2 billion krona ($3.8 billion).

Net Sales: Fourth-quarter net sales at H&M Group increased by 10 percent to 62.4 billion krona ($6 billion), up from 56.8 billion krona ($5.5 billion). Net sales were flat in local currencies. Excluding Russia, Belarus and Ukraine the increase was 11 percent in SEK and 2 percent in local currencies.

Net sales increased by 12 percent in the 2022 fiscal year to 223.6 billion krona ($21.7 billion) up from 199 billion krona ($19.3 billion) throughout the 2021 period. In local currencies, the increase was 6 percent. Excluding Russia, Belarus and Ukraine, the increase was 15 percent in SEK and 8 percent in local currencies.

Results for the year were impacted by one-time costs of 2.6 billion krona ($251 million) for winding down the Russian operations and from the cost and efficiency program.

Net Earnings: The group’s net earnings result after tax was a loss of 864 million krona ($83.5 million), corresponding to a per-share loss of 0.53 krona (5 cents) per share. In 2021, the fast-fashion retailer saw net earnings of $4.6 billion ($448 million), on 2.79 krona (27 cents) per share.

Operating profit for the September-to-November period was 821 million krona ($79.6 million), corresponding to an operating margin of 1.3 percent of sales. This total was down from the 2021 quarter’s 6.3 billion krona ($606.5 million), which included an 11 percent operating margin.

For the full year, H&M Group’s profit after tax was 3.6 billion krona ($345.5 million) on 2.16 krona (21 cents) per share. Adjusted for the one-time costs, profit after tax amounted to 5.6 billion krona (545.9 million) on 3.41 krona (33 cents) per share.

In 2021, profit after tax was 11 billion krona ($1.1 billion) on 6.65 krona (64 cents) per share.

Operating profit during the 2022 fiscal year was 7.2 billion krona ($694.7 million), with an operating margin of 3.2 percent of sales. Adjusted operating profit amounted to 9.76 billion krona ($945.7 million) and the operating margin was 4.4 percent of sales.

For the year prior, operating profit was 15.3 billion krona ($1.5 billion), corresponding to an operating margin of 7.7 percent.

CEO’s Take: H&M Group is also home to brands like Cos, Arket, Weekday and Monki, but Helmersson was blunt about where the investments lie going forward.

“Our highest priority is the H&M brand, where we are continuing to work on improving the assortment and the customer experience both in store and online while at the same time integrating the two channels further,” Helmersson said. “Development of all our brands continues in parallel, alongside initiatives in areas such as sport, beauty and home. Via our investment arm CO:LAB we are creating value through a range of exciting and innovative partnerships and business models. Sellpy is growing fast and is already one of the biggest players in secondhand fashion in Europe. To enable all this our investments in the supply chain, tech and AI are also continuing.”