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H&M Firing on All Cylinders

H&M Group’s second-quarter net sales increased by 17 percent to 54.5 billion Swedish kronor ($5.3 billion) from $46.5 billion ($4.6 billion) in the prior-year period, even after temporarily shuttering operations in Russia, one of its top markets. Net income came in at 3.7 billion kronor ($360 million) during the quarter, as the fast-fashion giant saw full-price sales rise as markdowns fell.

In a Nutshell: Sales in June are expected to decrease by 6 percent in local currencies compared with June 2021, with the paused sales in Russia, Belarus and Ukraine representing 5 percentage points of the dip. Russia was H&M’s sixth-biggest market with 4 percent of sales in the fourth quarter of 2021. The June figure is up against what H&M called a “very strong” comparison base in the year-ago month, when sales jumped 24 percent amid the reopening of more than 1,000 temporarily closed stores. Sales in July and August increased by 6 percent.

Amid the rising transportation and raw materials costs, alongside inflation concerns, the retailer expects to continue raising prices this year with adjustments specific to each market.

Total inventory amounted to 41.5 billion kronor ($4.1 billion) as of May 31, an increase of 16 percent compared with the same point in the previous year. On a currency-adjusted basis, the increase was 7 percent.

Approximately 20 percent of inventory has been pulled forward to counter supply chain delays, increased purchasing and freight costs, goods in Russia and goods that were intended for Russia but that have been reallocated to other markets.

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Although the Swedish fashion seller is enduring supply chain constraints like the rest of the industry, the company believes “there will be a good basis” over time for lower stock levels in relation to sales.

Gross margin increased 90 basis points (0.9 percentage points) to 54.8 percent in the quarter, up from the prior-year period’s 53.9 percent margin. For the six-month period, gross margin jumped to 52.2 percent from 50.9 percent year over year.

The fast-fashion giant attributed the increase to “well-received” collections, which led to more full-price sales and lower markdowns. This had a positive effect on the gross margin of nearly 1 percentage point compared with the same quarter the previous year.

“Well-received collections have led to strong development, with a further increase in full-price sales and decrease in markdowns,” Helena Helmersson, CEO of H&M Group, said in a statement. “Sales in physical stores increased substantially while online continues to do well. This once again shows the value of having both physical and digital channels which strengthen and complement each other. The integration of the sales channels is therefore ongoing, in parallel with continual initiatives—in particular within tech, the supply chain and sustainability.”

For the second quarter, the overall effect of external factors on margin was negative compared with the same purchasing period in 2021, driven mainly by increased prices for shipping and raw materials. H&M anticipates that these factors will continue to pressure margins in the third quarter.

The cost of markdowns in relation to sales is expected to be at the same level as last year’s third quarter.

For 2022, H&M Group plans to open 94 new stores and close 272 stores for net decrease of approximately 178 stores. Most of the openings will be in growth markets, while the closures will mainly be in established markets, it said.

This year, H&M will launch stores in six new markets, including the Cambodia franchise store that opened in March. Ecuador, Kosovo and North Macedonia, and Costa Rica and Guatemala will also host H&M franchise stores.

The company’s contracts allow approximately one-third of leases to be renegotiated or exited each year. H&M is continuing to renegotiate a large number of leases as part of the company’s intensified store optimization, which also involves rebuilds and adjusting the number of stores and store space to ensure the best store portfolio in each market.

The company still has 196 stores temporarily closed stores as of May 31. On top of the 181 stores closed in Russia, Belarus and Ukraine, 15 stores are temporarily closed in China due to the pandemic. The firm shuttered its Shanghai flagship store earlier this month, but has not indicated whether the closure is temporary or permanent. H&M has been struggling in China, finding itself embroiled in a consumer boycott in the market aimed at companies that spoke out on Xinjiang sourcing.

Cash flow from operating activities amounted to 12.6 billion kronor (1.2 billion), while financial net cash increased to 16.3 billion kronor ($1.6 billion). Cash and cash equivalents, including undrawn credit facilities amounted to 44.5 billion kronor ($4.4 billion).

H&M Group’s board of directors revealed the company would buy back its own B shares for 3 billion kroner ($303 million) starting June 29.

Net Sales: Net sales increased by 17 percent to 54.5 billion kronor ($5.3 billion) from $46.5 billion kronor ($4.6 billion) in the second quarter of 2021. On a currency-neutral basis, sales increased 12 percent. Excluding Russia, Belarus and Ukraine, sales increased by 17 percent on a currency-neutral basis.

The company’s net sales increased by 20 percent in the first six months of 2022 to 103.7 billion kronor ($10.2 billion), a boost from last year’s 86.6 billion kronor ($8.5 billion). On a constant-currency basis, net sales for the half-year period increased 15 percent.

Net Earnings: H&M Group’s net profit after tax increased to 3.7 billion kronor ($360 million), well ahead of last year’s quarterly after-tax income of 2.8 billion kronor ($270.9 million). Net earnings totaled 2.22 kronor (22 cents) per share, up from last year’s 1.67 kronor (16 cents) per share.

Operating profit in the second quarter was 5 billion kronor ($488.7 million), up from 3.9 billion kronor ($377.4 million) in the year-prior period, delivering an operating margin of 9.2 percent.

For the first six months of 2022, the group’s after-tax income increased to 3.9 billion kronor ($382 million) from 2021’s 1.7 billion kronor ($166.3 million) corresponding to 2.36 kronor (23 cents) per share, up from the 2021 period’s 1.03 kronor (10 cents) per share.

Operating profit in the six-month period jumped to 5.4 billion kronor ($533.6 million), up from 2.7 billion kronor ($266.9 million), which represented an operating margin of 5.3 percent.

CEO’s Take: “To navigate in a rapidly changing world it is more important than ever to be flexible and able to take quick decisions,” Helmersson said. “As a direct consequence of the challenges in the world around us we are carrying out extensive work to prioritize initiatives, redistribute resources and ensure continued good profitability. We have a well-positioned customer offering and are fully focused on meeting customers’ ever-increasing expectations. Despite the significant inflation in the world, customers must always feel confident that with all the H&M Group’s brands they will find the best combination of fashion, price, quality and sustainability. With a strong customer focus, committed colleagues and a robust financial position we see good opportunities for profitable, long-term and sustainable growth.”