H&M Q1 profit dives as cold weather hurts sales, but firm stays upbeat

By

Sandra Halliday

Published
Mar 27, 2018

Cold weather was cold comfort for H&M as the global retail giant saw its pre-tax profits plunging 61% in Q1 (the three months to February) on the back of weak sales.

And markdowns were a big problem as it simply had too much stock to shift. In fact, inventory levels rose 7% during Q1, partly as it added new stores but also partly because it didn’t shift as much stock as it had hoped in the previous quarter. And that means Q2 is being affected with “increased markdowns” compared to a year ago, a problem exacerbated by “unusually cold winter weather [that has] had a negative impact on the sales of spring garments.”

But the company is staying upbeat and is predicting a return to growth both for sales and profits. "We take a long-term view that, together with our knowledge and experience, enable us to navigate through times such as this... back to healthy growth in both sales and profitability,” H&M said.

CEO Karl-Johan Persson added:  “The rapid transformation of the fashion retail sector continues. The start of the year has been tough. 2018 is a transitional year for the H&M group, as we accelerate our transformation so that we can take advantage of the opportunities generated by rapid digitalisation.”

THE NUMBERS

So let’s look at the figures. Sales including VAT fell to SEK 53,554 million from SEK54,369 million in Q1. Excluding VAT they dropped to SEK46,181 million from SEK46,985 million. But in local currencies, sales including VAT were flat year-on-year.

Gross profit dropped to SEK 23,040 million from 24,466 million and corresponds to a gross margin of 49.9%, down from 52.1%. The big plunges came in pre-tax profit after financial items and net profit. The former was SEK1,263 million after SEK3,212 million a year ago and net profit fell to SEK 1,372 million from SEK2,457 million.

Was there any good news? The company said that H&M’s online store in India, which was launched in mid-March, “has got off to a very good start” and the launch of H&M and H&M Home on Tmall in China on 21 March “exceeded our high expectations.” Meanwhile, in the second half of this year, Uruguay and Ukraine will become new H&M markets.

The global rollout of online is continuing. With the launch of H&M online via franchise in Saudi Arabia and the United Arab Emirates in SS18, H&M will offer online shopping in 47 markets.

And Afound will be launched as a new brand during 2018. This will be an off-price marketplace offering products from well-known and popular fashion and lifestyle brands, both external brands and those from the H&M group. Its first stores and a digital marketplace will open in Sweden.