H&M abandons 2024 margin target as markdowns and costs hurt profit

H&M scrapped its earnings margin target for 2024 as higher discounting, costs and fierce competition hurt operating profit in the third quarter, sending shares in the world's No.2 listed fashion retailer down 8%.

H&M has struggled to boost its profitability amid high inflation, weaker consumer demand and competition from its bigger Spanish rival Zara, owned by Inditex, and cut-price online fast-fashion retailer Shein.

"At present we estimate that this year's operating margin will be lower than 10%," Chief Executive Daniel Erver said in a statement.

H&M said costs related to shutting down its online fashion outlet Afound hurt profit, as well as currency movements, and that the cost of markdowns had increased over the quarter.

H&M had cautioned in June that factors such as material costs made the 2024 target harder to reach, but scrapping the goal entirely with no new margin guidance increases the pressure on Erver, who has been CEO for just eight months, to accelerate the brand's turnaround.

H&M's operating margin for the first three quarters was 7.4%, with a third-quarter margin of 5.9%. The last year H&M produced a double-digit operating margin was 2017.

Erver said H&M was strengthening its brand by investing in marketing, products, and the shopping experience, and that he was confident the plan would boost sales and profitability.

H&M has been on a marketing blitz for its autumn/winter collection, hosting a London Fashion Week party featuring a performance by pop star Charli XCX, one of 12 events in eight cities overall to market the clothes.

H&M said its autumn collection was very well received and that sales for September are expected to rise by 11% in local currencies compared with the same period last year.

Operating profit for the Swedish group's fiscal third quarter stood at 3.51 billion Swedish crowns ($346 million) against 4.74 billion a year ago, and a mean forecast in an LSEG poll of analyst of 4.93 billion.

Inditex earlier this month reported a jump in sales of its autumn and winter collection after a sluggish summer marred by poor weather while Britain's Next raised its profit forecast on the back of better than expected recent trading.

Thursday's earnings report was only the second under Erver, a long-time company insider who took the helm in late January after the sudden resignation of his predecessor.

H&M said it would buy back shares worth 1 billion crowns, from Sept. 26 to Nov. 26. The Swedish retailer's shares have lagged Inditex's over the past years and are down 5% so far this year.