Russia exit dents H&M in Q3, but it sees September upturn
H&M Group’s nine-month report on Thursday showed a 13% rise in net sales in the period to the end of August, despite the exit from Russia.
But looking specifically at the third quarter, the Russia move had a much bigger impact with the result that while net sales rose 3% to SEK57.45 billion, they fell 4% in local currencies. That figure worked out at €5.25 billion, $5.07 billion and £4.7 billion.
The company recorded a one-time cost of SEK2.1 billion related to the winding down of its Russian operations.
It was also hit by increased raw materials and freight prices, as well as a stronger US dollar that resulted in substantial cost increases for purchases of goods. It meant the gross margin excluding the Russia cost was 50.4% and the reported gross margin was 49%, (down from 53.2%).
Operating profit excluding the Russian charge was SEK3 billion, down from SEK6.27 billion, corresponding to an operating margin of 5.2%, which was well down on the 11.3% of a year ago. Reported operating profit was SEK902 million, corresponding to an operating margin of a lowly 1.6%.
Profit after tax excluding the one-off cost was down to SEK2.15 billion from SEK4.69 billion. Reported profit after tax was SEK531 million.
CEO Helena Helmersson said the quarter was “largely impacted by our decision to pause sales and then wind down the business in Russia. This has had a significant effect on our sales and profitability, which explains half of the decrease in profits compared with the third quarter last year”.
But there were “many other external challenges” and “in common with the rest of the industry, sales were weak in many of our major markets at the start of the period. Sales then gradually improved, despite a heatwave in several European countries and some remaining delays in the supply of goods. Increased raw materials and freight prices, as well as a stronger US dollar, resulted in substantial cost increases for purchases of goods. We have chosen not to fully compensate for the increased costs, which is reflected in the gross margin. Overall, these factors had a substantial negative impact on profit for the quarter”.
Fortunately, things seem to be looking up, with the company saying that the autumn collections have been well received. Sales increased by 7% in local currencies from 1 to 27 September year on year.
And a cost and efficiency programme is being launched to further streamline the business. Overall, this is expected to result in annual savings of around SEK2 billion. The savings should start to show up in the second half of 2023.
Agreements have also been signed with developers of new solar farms to secure access to renewable energy for years to come. This will help the group reach its carbon reduction targets as well as “securing energy prices for parts of its own operations”.
Looking back at the whole nine-month period, the company said net sales rose by 13%, as mentioned, to SEK 161.12 billion, and rose 8% in local currencies.
The gross margin excluding the one-time cost for Russia was 51.3%, down less sharply from 51.8%.
Operating profit excluding the Russia cost was SEK8.09 billion, and the operating margin was down to 5% from 6.3%. Reported operating profit was SEK6.34 billion, down from SEK8.99 billion, corresponding to an operating margin of 3.9%.
Profit after tax excluding the one-time cost for Russia was down to SEK5.77 billion from SEK6.38 billion.
Clearly, the weak third quarter skewed the results, but that partial recovery during September is good news for the company and it said it provides "important proof that the H&M group is growing even when customers’ purchasing power is decreasing".
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