Can H&M Revive Top-Line Growth?

Welcome back to The Week Ahead. This is Eric Sylvers, BoF’s Milan correspondent, with a look at H&M’s upcoming earnings report, which will throw the spotlight on the Swedish retailer’s efforts to reignite sales.

H&M reports second-quarter earnings on Thursday, offering an update on the Swedish fast-fashion juggernaut’s bid to reignite sales growth by inching upmarket. Any upside surprise on sales would cheer investors worrying the company is losing appeal with its target consumer.

Financial analysts are expecting a small drop in revenue but higher operating profit – and therein lies the H&M conundrum. Revenue has been trending down over the past two years, while operating profit has increased 27 percent. Cutting costs and improving productivity can turn lower sales into higher profit, but it is not a playbook that works indefinitely.

For the fiscal second quarter, which runs from March to May, analysts expect net sales of 55.14 billion kronor ($5.74 billion) at constant exchange rates, a decline of less than 1 percent year-on-year. Operating profit is seen rising 8 percent to 6.38 billion kronor.

Boosting sales will remain challenging in an environment of weak consumer demand and the company’s reliance on promotions to stimulate business, Bernstein analysts wrote following first-quarter results, noting the retailer lacked a clear strategy of improving brand positioning in a price-sensitive environment.

But the contrast with Zara-owner Inditex is stark. While H&M has struggled to lift revenue, sales at Inditex rose 11 percent over the past two years, with operating profit up 18 percent.

H&M has long tried to turn its position – a tick underneath slightly higher-end Zara and above ultra-cheap Shein and Primark – into a virtue, but that has proved difficult.

The company has invested in elevating the brand, sending Korean fashion and beauty content creator Jihoon Kim down the red carpet at the Academy Awards in March in a custom gown designed by H&M Studio, the brand’s highest-end line.

With the quarter starting just days after the outbreak of the war in the Middle East, H&M’s results will offer a relatively clean snapshot of the conflict’s impact on retail sales. While the company generates only about 3 percent of revenue from the region, roughly half the exposure of most fashion brands, the war’s broader effect on consumer spending, and rising inflation, has weighed on demand.

In late March, about a month into the conflict, H&M said first-quarter sales fell 1 percent and warned consumer spending would take a hard hit if the war dragged on. Chief executive Daniel Erver also said he expected sales to rise 1 percent in March, the first month of the second quarter, a figure analysts had hoped would be higher.

H&M should benefit from favourable currency effects in the first half of the year, though those tailwinds are expected to fade in the second half, Deutsche Bank analysts wrote last month. Higher freight and raw material costs could pressure margins unless the company succeeds in passing the increase onto customers, while operating costs are starting to rise again as spending on technology increases. “With limited confidence in constant exchange-rate sales growth, we do not see this as an attractive setup,” Deutsche Bank said.

What Else to Watch for This Week

The fourth edition of The Business of Beauty Global Forum will be broadcast around the world on Wednesday and Thursday. Byunghoon Kim, CEO of APR Corp and flagship brand Medicube, will speak with The Business of Beauty executive editor Priya Rao about K-beauty’s growing global influence. Sephora CEO Guillaume Motte will share how the influential retailer creates desire, while Violet Grey’s Cassandra Grey and Kiko Milano’s Simone Dominici will discuss why value perception is reshaping luxury expectations. Meet more of the speakers and register for the livestream here.

The Week Ahead wants to hear from you! Send tips, suggestions, complaints and compliments to eric.sylvers@businessoffashion.com.