H&M's profits rose thanks to duty refunds. Why are its shares falling?

The refund of U.S. duties helped Swedish clothing retailer Hennes & Mauritz (H&M) offset modest sales growth and boost profits, according to Bloomberg. However, the company’s stock fell after H&M warned of rising purchasing costs.

A refund of U.S. customs duties paid boosted H&M’s third-quarter operating profit by 23% to 6.04 billion kronor ($609 million), according to a company statement. The result exceeded analysts’ expectations, who had forecast an average profit of 5.27 billion kronor, according to Bloomberg. The company’s operating margin in the third quarter was 10.6%. The margin was impacted by one-time factors, including duty refunds—H&M estimated this effect at 1.6 percentage points.

Net income increased by approximately 28% compared with the same period last year. Sales rose 1% in local currency year-over-year. H&M’s sales growth slowed amid fierce competition from Shein and Inditex, the owner of Zara, Reuters notes. Inditex reported a 9% increase in sales for the first half of the year earlier in September.

The retailer’s stock in Stockholm fell by more than 3% following the release of its financial results. Investors were alarmed by the company’s warning of certain challenges in the coming months. According to H&M CEO Daniel Erver, disruptions in sea and air freight caused by the war in the Middle East have already led to higher transportation costs and delivery delays. In the current quarter, H&M expects purchasing costs to rise further, and the retailer will have to offer more discounts ahead of Black Friday.

Since the start of the year, H&M’s stock has fallen 12%. Clothing retailers are facing challenges as shoppers begin to cut back on spending amid rising living costs, while fierce competition and geopolitical factors are putting further pressure on margins, according to Bloomberg. Nevertheless, H&M has improved its efficiency after years of cost-cutting: inventory optimization, reduced discounts, and flexible logistics have helped boost profitability, the agency notes.

"The improvement is clear. The operating margin [excluding one-time factors] is now 9%, compared with 7.2% for the same period last year," Bloomberg quotes Erver as saying.

“With the potential for cost cuts having been exhausted and the cost of goods rising, further profit growth ‘depends largely on accelerating revenue growth,’” noted Jefferies analyst James Grzinich. He maintained his previous recommendation on the company’s stock, keeping it at “neutral.” The price target remains set at 160 crowns. His target implies a 3.6% decline from the most recent closing price.

"They are still struggling to accelerate sales growth," Reuters quotes Inderes analyst Lukas Matsson as saying.

The consensus forecast among analysts for H&M stock is generally cautiously pessimistic. Thirteen of the 26 analysts covering the company’s stock advise selling it. Twelve of them recommend holding the stock in a portfolio. Only one recommends buying.

This article was AI-translated and verified by a human editor