H&M Soars Despite Inventory Record as CEO Says Worst Is Over

(Bloomberg) -- Hennes & Mauritz AB shares jumped as the embattled retailer’s chief executive officer expressed optimism that he’s coming to grips with record apparel backlogs that have hit its profit.

H&M’s inventories have been a persistent problem, rising steadily as the Stockholm-based fast-fashion chain failed to keep up with consumers’ tastes and was struck by logistics woes. The company says it’s working through the excess stocks and will be able to scale back discounting as a result, even as it irons out its supply problems.

H&M Soars Despite Inventory Record as CEO Says Worst Is Over

“This is a step in the right direction,” CEO Karl-Johan Persson said in an interview Thursday. “We took market share in most markets, largely because our new collections are appreciated by the customers.” However, he said H&M wouldn’t hit its sales-growth target of 10 percent to 15 percent this year, and he declined to comment on next year.

The shares soared as much as 13 percent in Stockholm trading. Analysts at RBC Capital Markets pointed to H&M’s forecast that fourth-quarter markdowns will be about flat with last year’s, as well as a third-quarter gross margin that beat estimates.

H&M Soars Despite Inventory Record as CEO Says Worst Is Over

The stock gain was driven in part by a squeeze on short sellers, as these pessimistic investors rushed to cover their negative bets. About 29 percent of H&M’s free float is shorted, meaning investors borrowed shares thinking their value would decline. The shares had lost more than a third of their value in the past year.

The results come as weakness among clothing retailers has pitted them in a battle to lower prices. Sales at Gap Inc., discount-clothing retailer Primark and Hong Kong-based Esprit have been under pressure, and Zara parent Inditex SA reported its weakest sales growth in four years this month.

“We’re not in a crisis, but we’ve had a negative development, and now we see positive signals in the third quarter and I believe that will continue,” Persson said in the interview.

Online sales were a bright spot for H&M, rising 32 percent, though the retailer still may struggle to reach its target for a full-year increase of at least 25 percent because first-half e-commerce missed that level.

Charles Allen, an analyst at Bloomberg Intelligence, cautioned that Thursday’s market optimism might be excessive. He pointed out that at this time last year, Persson said the company believed that a big summer clearance wouldn’t need to be repeated.

H&M’s operating profit fell 19 percent to 3.98 billion kronor ($450 million) in the three months through August, marking the 10th decline in 12 quarters. Analysts expected 4.16 billion kronor. Stock-in-trade rose 15 percent to 38.7 billion kronor.

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