H&M's operating profit grew more than expected, though sales growth remains weak

Swedish clothing retailer H&M reported higher-than-expected operating profit for the third quarter. The result was supported by cost control, improved purchasing, and operational efficiency, though the company's shares fell more than 3% at the start of trading due to weak sales growth.

In the June-August period, H&M's operating profit came to SEK 6.04 billion (approximately $608.6 million), compared with SEK 4.91 billion a year earlier. Analysts polled by LSEG had expected an average of SEK 5.14 billion.

The company's gross profit margin rose to 54.0%, up from 52.9% a year earlier and above analysts' forecast of 53.4%. However, the year-earlier figure was positively affected by a one-off reimbursement of tariffs paid in the US.

At the same time, sales growth remains limited. In the third quarter, sales in local currencies grew by only 1%, and H&M forecasts that growth in September will also be around 1%. It was this weak sales outlook that triggered investors' negative reaction.

According to CEO Daniel Ervér, the company is trying to respond more quickly to changing fashion trends by sourcing clothing on shorter lead times and from factories located closer to its main markets. H&M is also continuing to focus on cost control and improving operational processes.

In the third quarter, the company's inventories rose 9% when excluding currency effects, which H&M attributed to disruptions in global supply chains. The ongoing conflict in the Middle East has increased shipping and air freight costs and delayed delivery of some products.

For the fourth quarter, H&M expects a certain negative impact from external factors. The share of sales-related discount costs may also rise slightly, as this year's promotional and discount period ahead of Black Friday will be longer, while Cyber Monday falls in November.

H&M's third-quarter sales totaled SEK 57.19 billion, compared with SEK 57.02 billion a year earlier.