(Bloomberg) — Hennes & Mauritz AB’s profit rose as refunds of US tariffs helped the Swedish fashion retailer offset a modest growth in sales.
Operating profit increased to 6.04 billion kronor ($609 million) in the three months through August, the company said in a statement Thursday. That beat the 5.27 billion-kronor average estimate from analysts. Fiscal third-quarter sales inched up 1% in local currencies.
The results were broadly in line with expectations, but with dwindling opportunities for cutting expenses and rising costs of goods, further profit gains are “more reliant on accelerating top-line delivery,” Jefferies analyst James Grzinic wrote in a note.
Shares tumbled as much as 3.7% in Stockholm as the company signaled some headwinds for the months ahead. Before Thursday, the stock had dropped more than 10% this year.
H&M said it expects external factors to hit purchasing costs in the fourth quarter and that markdowns will rise slightly as retailers stretch out promotions ahead of Black Friday. Freight costs had already risen in the third quarter, it said.
Fashion retailers have been hurt as consumers contending with a cost of living crisis have pulled back, putting pressure on margins amid intensifying competition and geopolitical tensions. But H&M has emerged leaner from years of cost cutting, with tighter inventories, fewer markdowns and a more responsive supply chain helping it rebuild profitability.
“The improvement is clear,” Chief Executive Officer Daniel Ervér said on an earnings call. “The operating margin is now at 9% versus 7.2% for the same time last year.”
That said, he has struggled to deliver consistent sales growth, leaving H&M trailing larger Spanish rival Inditex. The Zara owner recently disappointed on profit after rising logistics and distribution costs weighed on earnings. But it said sales, excluding currency swings, rose 9% between Aug. 1 and Sept. 7.
H&M said sales in September, the first month of its fiscal fourth quarter, are expected to rise 1% from a year earlier in local currencies, giving an early read on how its fall collections are being received by shoppers.
“Going forward, more will need to come from sales growth,” Ervér conceded in an interview. “We have now built a very strong foundation to stand on, and sales growth will help us drive strong profitability growth.”
He noted, however, that the climate remains tough as consumers are under “heavy pressure” from high living costs, inflation and rising interest rates.
In the latest quarter, the retailer’s gross margins were helped by one-time effects of about 1.6 percentage points from tariffs and goods imports that had increased the cost of goods sold in previous quarters.
Analysts had flagged the tariff payments as a potential boost to reported profit that would not reflect an improvement in the underlying business.
(Updates with comments from CEO interview.)
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