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H&M will cut costs as inflation hits profits, shoppers warn

H&M will cut costs as inflation hits profits, shoppers warn

By Anna Ringstrรถm and Marie Manns

STOCKHOLM (Reuters) – H&M, the world’s second-largest fashion retailer, launched a two billion Swedish kronor ($177 million) cost-saving campaign on Thursday after reporting weaker-than-expected earnings.

In Europe, where H&M does most of its business, conflict in Ukraine, record energy prices and high inflation are weighing on consumer confidence, and households are cutting spending.

The Swedish group’s pre-tax profit in the third quarter fell to 689 million crowns ($60.9 million) from 6.09 billion a year earlier, well below the 2.98 billion expected by five analysts polled by Refinitiv.

Chief Executive Helena Helmerson told Reuters a large part of the savings program would come from streamlining organizational structures and buying fewer technology services. She said reducing business travel and lower office rents are other goals of the programme.

H&M said the benefits should be felt in the second half of 2023.

Its shares were down 3% at 1135 GMT, bringing their year-to-date decline to 43%.

H&M said a non-recurring 2.1 billion crown cost of winding up its Russia business, which was announced last July, made up about half of the profit drop.

Earlier this month, the group reported lower-than-expected sales as shoppers curbed spending but said demand improved late in the quarter.

The retailer said on Thursday that a heat wave in many European markets in the summer and delays in the supply chain also affected sales.

Meanwhile, increased raw material and freight prices and a rising US dollar led to significant cost increases.

“Overall, these factors had a significant negative impact on profit,” said CEO Helena Helmerson. โ€œWe have chosen not to fully compensate for the increased costs, which is reflected in the gross margin.โ€

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She told Reuters that H&M has raised prices in some sectors, such as women’s couture clothing, to varying degrees across markets, and that prices will remain an important tool in bearing higher costs.

“Flexibility in pricing is going to be the important thing now in the future,” she said in an interview.

Receipt of the application for the month of September

โ€œWe see significant margin headwinds, especially given the strength of the US dollar relative to the euro, as well as higher energy costs and the loss of high-margin Russian businesses,โ€ Richard Chamberlain, an analyst at Royal Bank of Canada, said in a note to clients.

Market guide Inditex (BME :), owner of Zara, which withstood tough market conditions better than H&M, increased sales in the May-July quarter. However, the growth of the Spanish group slowed down from August 1 to September. 11 period.

H&M said its fall collections were well received, with sales up 7% year-over-year in local currencies from September 1 to 27 โ€” the start of the fourth fiscal quarter โ€” versus a 4% decline in the third quarter. More favorable weather also contributed, Helmerson said.

She told analysts that markets such as Central Europe were weak in the June-August quarter but rebounded in September.

“Despite the modest outlook, profitability in the third quarter was significantly worse than expected and margins forecasts over the next year continue to deteriorate,” said analysts at Credit Suisse.

Britain’s Nazernext on Thursday cut its sales and profit forecasts, citing increased pressure on household budgets in the coming months.

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(1 dollar = 11.3104 Swedish krona)

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