H&M slips in Stockholm, weighed down by profits inflated by US refunds and a rise in stock levels

  (Il Sole 24 Ore Radiocor) - The quarterly results of Hennes & Mauritz fail to impress investors, and on the Stockholm Stock Exchange this morning, the clothing group’s share price fell by 3 per cent to 161.30 Swedish kronor. H&M’s operating profit in the third quarter significantly exceeded expectations, but analysts point out that most of the difference is due to the refund of US tariffs. The rise in stock levels is also a cause for concern. In the quarter, H&M recorded an EBIT of 6.037 billion Swedish kronor (up from 4.9 billion last year), 18 per cent higher than consensus estimates. Net profit rose from 3.2 to 4.1 billion, and turnover totalled 57.2 billion, up 0.3 per cent on a reported basis and 1 per cent in local currency, broadly in line with forecasts.

Inventories at the end of the third quarter stood at 39,355 million kronor (up from 37,938), with a composition that the group described as positive. The increase – H&M explained – is due to the rise in the value of goods in transit, a consequence of disruptions to global supply chains, as well as temporary effects linked to the consolidation of the European logistics network. The group stated that sales for the month of September are expected to rise by 1 per cent in local currency.

“Our summer collections were well received and helped to boost sales, particularly towards the end of the quarter. At the same time, sales were affected by ongoing disruptions to the logistics network in Europe and the global supply chain,” commentedCEO Daniel Ervér. “We are heading into autumn with a balanced stock mix and are well positioned to meet our customers’ needs,” added Ervér regarding the outlook.

Analysts’ comments struck a different note. Experts at SB1 estimate that around 900 million kronor of the operating profit stemmed from refunds for tariffs. Excluding these factors, EBIT stood at just over 5.1 billion kronor, broadly in line with consensus estimates. The sales outlook for September is also considered to be slightly weak. According to Barclays, H&M’s underlying earnings slightly exceeded expectations in the third quarter, and the outlook for the fourth quarter is weak, mainly due to pressure on the gross margin and rising stock levels.

Excluding customs refunds, EBIT was approximately 1 per cent higher than consensus estimates, mainly due to effective cost control, according to the British bank. Meanwhile, the underlying gross margin fell to 52.4 per cent, below the consensus estimate of 53.3 per cent. Barclays expects continued pressure on margins in the fourth quarter as well, mainly due to unfavourable external factors. Inventories, meanwhile, rose by 9 per cent in local currency and accounted for 17.8 per cent of sales over the last twelve months, compared with 16.4 per cent in the previous year.