H&M 1Q earnings beat estimates on fewer discounts

Hennes & Mauritz reported a 17% decline in pretax profits to US$112 million. (Bloomberg pic)

GENEVA: Hennes & Mauritz AB reported first-quarter profit that beat expectations as the struggling Swedish clothing retailer cut back on clearance sales.

Pretax profit fell 17% to 1.04 billion Swedish kronor (US$112 million) in the three months through February, the Stockholm-based company said Friday.

While that’s the smallest quarterly profit in 18 years, it beat analysts’ estimates for 678 million kronor.

H&M pulled back on discounts compared to the fire sale it held in the year-earlier period.

Instead, the retailer has been introducing new products at lower prices to try to avoid massive discounts later. However, the amount of unsold products is building up again, which is becoming a perennial problem for H&M.

Inventory as a percentage of sales rose to 18.6% from 17.9% in the fourth quarter.

The company is struggling to meet increased competition from online retailers like Zalando and low-price competitors including Primark.

Its efforts have been plagued by logistics and distribution mishaps, fashion misjudgments and weak sales in physical stores.

Sales growth accelerated so far in the second quarter, rising 7% in local currencies in March compared to 4% in the first quarter.

The company said it expects markdowns to be even less significant in the three months through May.

H&M said it plans to shrink its store network in Europe even as it expands elsewhere.

Europe will have 50 fewer H&M shops at the end of this year, while the retailer increases its store count by 175 worldwide.

The shares have climbed 12% this year.

H&M is vulnerable to “short squeezes,” when a bit of good news spurs short-sellers to rush to reverse those positions.

Investors have bet against more than a sixth of H&M’s freely traded shares, betting they will decline, according to IHS Markit data.