H&M: Stuck in the Middle With You

It’s been just over a year since H&M announced a surprise change in leadership, ousting pandemic-era CEO Helena Helmersson and appointing company veteran Daniel Ervér in her stead.

Ervér’s challenge was to rejuvenate sales at the world’s second-biggest publicly traded fashion retailer, which had become stuck in a squeezed middle market between low-priced Shein and more premium Zara. His solution: make H&M cool again.

This fall, the brand launched a high-octane marketing campaign featuring Brat-summer architect Charli XCX. Behind the scenes, Ervér turned his focus to refreshing the company’s design chops, upgrading the H&M shopping experience and ensuring the brand was competing on value.

“The starting point is to be really attractive, relevant and delight and surprise the customer,” Ervér told analysts on a call to discuss the company’s first quarter earnings. “We believe that will lead to sales growth.”

The results released Thursday and covering the bulk of the holiday shopping period, were therefore an important litmus test for Ervér’s turnaround strategy, offering an early taste of how consumers responded to the brand’s big marketing push.

The verdict: H&M has a lot more work to do.

Sales rose 3 percent year-on-year in the three months ending Feb. 28 to reach SEK55.3 billion ($5.52 billion), underperforming analyst expectations of SEK55.8 billion. Operating profit of SEK1.2 billion ($0.1 billion) was below the average SEK1.9 billion forecast by analysts. The value of inventory held in stock rose 9 percent, raising the risk the company will have to resort to heftier discounting in the coming quarters. A medium-term target to reach an operating profit margin of 10 percent is increasingly elusive.

As Deutsche Bank put it in a note after the results came out, the Swedish retailer’s latest round of earnings managed to disappoint, despite already low expectations. The reaction from investors was muted, with shares trading broadly flat Thursday. They are down 10 percent since Ervér took over last January.

H&M said it expects things to pick up in the second half, as it sees more results from its spending on design and marketing and profitability drags from investment, hefty discounting and adverse exchange rates ease off. Sales grew just 1 percent in March, signalling a slow start to the spring/summer season.

“Even if we have taken important steps we are not satisfied with our results in the first quarter,” Ervér said on an earnings call. “We stand steadfast in our focus on our long-term plan.”

Under Pressure

Ervér’s job is not an easy one. The brand is trying to position itself as a goldilocks label, offering clothes that are better quality than Shein, but cheaper than Zara. “We’re very focused on providing outstanding value for money,” Ervér said.

It’s a crowded and intensely competitive part of the market with plenty of options for consumers looking for a mix of social-media-worthy trend pieces and affordable basics, from Primark, Mango and Uniqlo to Abercrombie and Gap.

H&M’s fashion-focused turnaround playbook doesn’t have much to distinguish itself from the strategies of other brands vying to restore faded fortunes, who have also laid out strategies that revolve around variations on improved product, more marketing and slicker shopping experiences. Few have managed to pull it off.

H&M’s problem is that it’s still operating on a 2005 business model in a 2025 market, said Bernstein analyst William Woods. While brands like Shein and Zara are leaning into fast fashion’s accelerating pace with blink-and-you-miss-it drops, H&M is still largely operating around seasons. That’s part of the reason why it has a persistent problem with excess inventory and hefty discounting.

“The business model is still slow. They’re still on six month lead times, not near-shoring much and not really sustaining the product newness,” said Woods. “Zara is dropping product into stores once a week.”

In some ways, the company’s Charli XCX tie up was emblematic of this lack of agility. The launch event for its reenergised new look took place in mid September, two weeks after the singer put out a social media post bidding “goodbye forever” to brat summer.

An uptick in sales in the wake of the launch was more down to good weather and low comparable numbers a year earlier than the brand marketing campaign, according to the company. Ervér said the activations aren’t intended to have an immediate effect, but rather drive steady sales growth throughout the year.

“For a lot of customers H&M has lost what it stands for and why they would shop there,” said Deutsche Bank Research analyst Adam Cochrane. “Do they have to do even more in terms of marketing to get the brand moving?”

Meanwhile, there is little to suggest that the market is going to become more forgiving. Geopolitical uncertainty and mounting trade tensions are having a dampening effect on consumer spending and eating up executive headspace with tariff management plans.

H&M’s biggest manufacturing hubs are China and Bangladesh. The former has already been hit with a 20 percent tariff on imports to the US.

The company said it is working to shift its sourcing to markets with lower tariff burdens.

“Work has been ongoing for quite some time to find relative alternatives to ensure that we can offer also the US customer the best value for money despite some of these strains to global trade,” said H&M CFO Adam Karlsson. Nonetheless, higher import duties will likely mean higher prices for consumers. “We will, of course, also work with the price positioning. We will follow how competitors do this,” Karlsson added.