Fashion Retailer H&M's Sales Jump, But Investors Fret Over Margins

H&M, the world's second-biggest fashion retailer, posted a forecast-beating 17% jump in March-May sales, joining main rival Inditex in reporting a rebound in demand as pandemic restrictions have eased.

Sales were, however, still lower than before the pandemic began. Investors also voiced concerns over profit margins ahead of H&M's full quarterly earnings report due on June 29.

H&M in March flagged price hikes to compensate for higher raw material and transport costs. Meanwhile, souring consumer confidence in Europe and stores that were closed in Russia due to the war in Ukraine could prompt price markdowns to help shift unsold clothes.

H&M did not comment on the sales figures on Wednesday, and its shares were down 6% by 1000 GMT, taking a year-to-date drop to 29%.

"Whilst in a less spectacular manner than Inditex last week, H&M also confirms today that the reopening process in Europe has led to strong demand conditions persisting in recent weeks," Jefferies analysts, with a "hold" rating on H&M shares, said in a note to clients.

They added, however: "Investors will be keen to better understand the extent to which price recovery is offsetting mounting input pressures and rebuilding costs."

Sales were up 12% year-on-year when measured in local currencies, at 54.5 billion crowns ($5.4 billion) in its fiscal second quarter, the Swedish company said in a statement. Analysts polled by Refinitiv had on average predicted sales of 52.8 billion crowns.

"Whilst the top line improvement is encouraging, we are mindful that strength in clothing trends over summer could be short-lived as the consumer environment weakens," JPMorgan analysts said in a note.

"We note that Nordics sports retailer XXL profit warned on Q2 yesterday evening, and that this followed a warning last week from online clothing pure-play Boozt, with both citing weakening consumer sentiment," they said.

Inditex, the owner of Zara, reported an 80% jump in quarterly profit last week.

"Although H&M has stated previously that external factors on gross margin ... have moved negative now, we see potential for markdown to help to offset this in Q2," RBC analyst Richard Chamberlain, with an 'outperform' rating on H&M's shares, said in a note.

"We see greater risk for Q3 given the need for Russia inventory clearance/reallocation," he said.

($1 = 10.1396 Swedish crowns)