H&M Surges as Earnings Beat Estimates on Fewer Discounts

(Bloomberg) -- Hennes & Mauritz AB shares surged after the ailing Swedish clothing retailer reported first-quarter profit that beat expectations on lower clearance sales.

The stock rose as much as 16 percent after the company pulled back on discounts, compared with the fire sale it held a year earlier. The gains may have been spurred by “short squeezes,” when a bit of good news spurs investors who have bet against the stock to rush to reverse positions. The shares have still lost more than half their value since their 2015 peak.

The company showed some signs of coming to grips with increased competition from online retailers like Zalando SE and low-price competitors including Primark. Until now its efforts have been plagued by logistics and distribution mishaps, fashion misjudgments and weak sales in physical stores. H&M has been introducing garments at lower prices to try to avoid massive discounts later.

“It’s still a shaky market,” said Chief Executive Officer Karl-Johan Persson on a conference call with analysts. “We’re still in a transition period, but we believe in gradual improvement.”

Sales growth accelerated so far in the second quarter, rising 7 percent in local currencies in March compared to 4 percent in the first quarter. The Stockholm-based company said Friday that it expects markdowns to be even less significant in the three months through May.

However, the amount of unsold products is building up up again, which is becoming a perennial problem for H&M. Inventory as a percentage of sales rose to 18.6 percent from 17.9 percent in the fourth quarter. Persson said H&M still can’t give a deadline for when it aims to achieve its goal of reducing that to a range of 12 percent to 14 percent.

The CEO also said the unsold garments have a better composition as they’re mostly garments that the retailer can sell in spring and summer.

H&M plans to reduce its store count in Europe by 50 shops this year, and Persson said the retailer will probably keep retrenching in that market until 2025. Next year H&M will close a similar number, or even more, in the region, he said.

Meanwhile, H&M is expanding in Asia, the U.S. and Latin America. The company plans to add 175 stores to its total worldwide this year.

Pretax profit of 1.04 billion Swedish kronor ($112 million) in the three months through February was the smallest quarterly total in 18 years, but it beat analysts’ estimates for 678 million kronor. This is the seventh consecutive quarterly earnings decline.

Investors have bet against more than a sixth of H&M’s freely traded shares, expecting them to decline, according to IHS Markit data.

Among other details:

• Persson said H&M will soon place limits on the free delivery and returns it offers the 35 million members of its Club program. Analysts have said that’s been weighing on profitability.
• Adverse currency shifts are increasingly pushing up buying costs, Persson said.

To contact the reporters on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net;Anna Molin in Stockholm at amolin3@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier, John J. Edwards III

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