H&M Earnings Return to Growth After Two-Year Slump

(Bloomberg) -- Hennes & Mauritz AB rose to the highest in almost two years after a popular summer collection helped the Swedish retailer put a dent into its bulging inventory.

The stock rose as much as 7.5% after quarterly earnings gained for the first time this year. The third-quarter report was a rare bright spot in the gloomy world of retail after the bankruptcy of U.S. chain Forever 21 Inc. earlier this week.

“The new season has got off to a promising start,” Chief Executive Officer Karl-Johan Persson said in a statement. Warm weather in September helped drive sales in many markets, he said on a call.

Fashion has been a cutthroat market lately. U.K. clothier Ted Baker Plc lost more than a third of its market value Thursday after warnings results could fall this year. H&M managed to boost sales in the key U.S. market by 19% as it slashed prices to as low as $5.99 for skinny jeans and $17.99 for a dress with a belt.

On the whole, though, H&M offered fewer discounts, helping sales rise for a sixth consecutive quarter and leading to a small reduction in inventory.

“H&M has a multiyear markdown recovery opportunity,” wrote Richard Chamberlain, an analyst at RBC. Sales grew faster than inventory for the first time in seven years in the quarter, he also said.

Revenue growth kept its momentum into the fourth quarter, and the company trimmed its store opening plan for the second time this year. H&M said purchasing conditions remain tough this quarter as the strong dollar raises the cost of garments. The U.S. just got permission from the World Trade Organization to impose tariffs on a range of products including suits and bikinis.

H&M stock can be volatile because short sellers have bet against about a sixth of the company’s freely traded shares, according to IHS Markit data. The shares have gained more than 50% this year.

Some analysts remained bearish, including Morgan Stanley’s Geoff Ruddell, who said the earnings growth was entirely driven by reducing markdowns. He said this is probably a “false dawn.”

CEO Persson declined to forecast when the retailer will reach its goal for inventory reduction.

“We believe in further improvements in stock levels,” he told analysts on a call. “It’s hard to put a timeline on it.”

Persson told analysts operating expenses will remain high next year, and he sees potential to reduce rental costs in many markets next year.

“H&M is making the right investments into the business to drive improved top-line growth, but these investments come at a cost, which limits earnings growth,” Berenberg’s Michelle Wilson wrote.

The analyst also said H&M had the second quarterly like-for-like sales growth in three years.

Some of the company’s sales growth is coming from a weaker krona, which boosts revenue from abroad when translated into the Swedish currency. However, the foreign-exchange move also makes it more expensive to source goods from Asia.

Pretax profit rose 25% to 5.01 billion kronor ($506 million) in the three months through August, beating expectations.

--With assistance from Hanna Hoikkala and Veronica Ek.

To contact the reporter on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Marthe Fourcade

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