After a weak third quarter, H&M is looking to save 2.0 billion Swedish Krona ($177 million) annually, and it might get some of that by seeing if customers are okay with paying a fee to return online purchases they don’t want to keep.
In a Nutshell: H&M cited high inflation, its exit from Russia in the wake of the country’s Ukraine invasion, and a European heatwave that weighed on sales as the reasons why third-quarter profits fell.
“The third quarter has largely been impacted by our decision to pause sales and then wind down the business in Russia. This has had a significant effect on our sales and profitability, which explains half of the decrease in profits compared with the third quarter last year,” H&M CEO Helena Helmersson said in a statement. The company is also winding down its Belarus business.
The Cos, & Other Stores, H&M Home and Arket owner is taking a page from fellow fast-fashion rivals in reconsidering making all online returns free.
“We are about to test return fees in a few of the markets to see the response from the customers,” Helmersson recently told investors during a conference call. The pilot will help H&M decide if it should “fast track” or fold the returns fee rollout.
H&M is one of the last to implement a fee for online returns sent back via a third party. Boohoo in July started charging a 1.99 pound ($2.37) returns fee. The British e-tailer followed the 1.95 pound ($2.39) fee implemented by Inditex-owned Zara in May for returns dropped off with a third party. Uniqlo revised its return policy in March 2021.
The Green Machine collaborator said higher raw materials and freight prices, and a strong U.S. dollar, drove up the cost of goods. She said the Swedish retail giant decided lower margins were better than sticking customers with higher costs.
Chief financial officer Adam Karlsson said some prices were adjusted “only to compensate for the severe headwinds in sourcing.” Helmersson clarified that price increases were applied “differently in different markets and in different segments within our assortment.”
However, Karlsson didn’t elaborate on whether the company marked down more product as a result of shoppers refusing to pay higher prices. He instead framed the markdowns as an “opportunity to activate customers” through “attractive pricing.”
Customers spent less with the retailer to adjust to higher energy costs. Karlsson expects cost inflation will worsen in the fourth quarter as “energy costs and prices” remain a challenge going forward.
Herlmersson said the retailer plans to save $177 million by simplifying its org structure, trimming business travel, reducing office rent costs, and other initiatives. H&M should start to see the results of these efforts in the second half of next year.
The company is moving ahead with customer-friendly enhancements. It continues to integrate sales channels and digitize its supply chain. Customer have more payments choices in store and online. Next day and express delivery options are available in more markets, and shoppers in the Netherlands, Sweden, Italy, France and Germany can get purchases delivered by an eco-friendly bike service. Plus, more stores now accept online returns. H&M is also rolling out self-service checkouts to more markets.
“With our long-term approach, we are continuously developing all parts of the company with a focus on meeting customers ever increasing expectations of affordable and sustainable fashion,” Helmersson said. “It’s now more important than ever to continue offering customers the best value for money. Customers should always feel confident that all the Group’s brands provide the best combination of fashion, price, quality and sustainability.”
H&M continues to adjust its store network, renegotiate leases and open doors in growth markets. New markets include Ecuador and Kosovo, as well as online sites for Columbia, Peru and Uruguay. It is also closing some stores in established markets. The company plans to open 89 new stores and close 254 locations this year, for a net decrease of 165, excluding Russia, Belarus and Ukraine. At the end of the quarter, it operated 4,664 doors companywide.
Net Sales: For the three months ended Aug. 31, net sales rose 3 percent to 57.45 billion Swedish Krona ($5.14 billion) from 55.585 million Swedish Krona ($4.97 billion).
The company said higher markdowns in the quarter shaved 0.5 percent off gross margins.
For the nine months, net sales rose to 161.12 billion Swedish Krona ($14.40 billion) from 142.15 billion Swedish Krona ($12.71 billion).
Earnings: Profits after tax were 531 million Swedish Krona ($47.47 million), or 0.32 Swedish Krona ($0.029) a share, from 4.69 billion Swedish Krona ($419.5 million), or 2.83 Swedish Krona ($0.25). On an adjusted basis excluding a one-time charge for Russia, profits after tax were 2.15 billion Swedish billion ($192.3 million), or 1.30 Swedish Krona ($0.12) a share.
Helmersson said early fourth quarter sales were up 7 percent. Latin America, North America and Southeast Asia saw growth while parts of Europe, Central East and Northern Europe, didn’t do as well but improved somewhat last month, she said.
For the nine months, profits after tax was 4.43 billion ($396.0 million) or 2.68 Swedish Krona ($0.24) a share, from 6.39 billion Swedish Krona ($571.2 million), or 3.86 Swedish Krona ($0.35).
CEO’s Take: “The autumn collections have been well received and sales in September are up on the previous year, providing important proof that the H&M Group is growing even when customers’ purchasing power is decreasing,” Helmersson said.