Shares of H&M saw a remarkable 14% surge in early trading on Wednesday following the release of their first quarter financial results. The company exceeded profit expectations with an operating profit of 2.08 billion Swedish kronor ($196 million), far surpassing the forecast of 1.43 billion kronor. This impressive performance saw the company’s operating margin rise to 3.9% from 1.3%, solidifying their target of achieving a 10% operating margin for the year.
Despite a slight decrease in net sales year-on-year, H&M has been focusing on enhancing profitability amidst stiff competition from rivals like Zara and Chinese fast-fashion brands like Shein. H&M Group CEO, Daniel Ervér, emphasized the positive direction the company is heading in, with an improved gross margin, lower inventory levels, and strong cash flow. Ervér reasserted that strengthening sales remains a top priority for the company, with plans to lower prices by the end of 2024 compared to the beginning of the year.
One of the key challenges for H&M has been managing excess unsold stock, which the company has been actively addressing. In the first quarter, inventory decreased by 7% year-on-year, showcasing progress in this area. The company’s board also announced plans to propose a dividend of 6.5 kronor per share at the upcoming annual general meeting in May, as well as seek authorization for a buyback of its B shares.
Analysts at Jefferies noted a “mixed top line delivery” in the quarterly results but highlighted a significant gross margin beat of 51.5%. The positive sales momentum observed in the early spring/summer season provided credibility to H&M’s ambitious 10% operating margin target. Despite a history of volatility in H&M’s share price, with a 37% decline in 2022 followed by a 57% gain in 2023, the recent financial results have instilled confidence in the company’s future prospects.
H&M’s strong first quarter performance reflects its strategic focus on profitability and operational efficiency. The company’s proactive measures to address inventory challenges and enhance financial stability have been well received by both analysts and investors, positioning H&M for continued growth in the competitive retail landscape.