Referenews

On Friday, the Swedish company reported a 68% drop in net profit for the 12 months ending Nov. 30 to 3.6 billion Swedish kronor, equivalent to $349 million. Besides 2020 when the pandemic forced H&M to shut thousands of stores, it was the company’s weakest profit performance in over two decades. 

The sharp fall in profit came despite a rise in sales, as higher costs for raw materials, energy and freight devoured margins. Profit was also hit by a one-time accounting charge of 2.6 billion kronor related to the closure of H&M’s operations in Russia and to a cost-cutting program announced in November.

While sales rose 12% to 224 billion kronor, they were still below the 233 billion kronor reported for 2019 before the emergence of Covid-19.

Shares of H&M fell about 7% in early trading in Stockholm, before recovering slightly.

With the company focused on resetting after the pandemic, the disruption of 2022 took the company by surprise, H&M Chief Executive

Helena Helmersson

said in an interview. “We were gearing up for growth in the beginning of the year, and then came the war” in Ukraine, she said.

The first quarter of this year would remain tough but “gradually things will become better, especially in the second half of the year,” Ms. Helmersson said. 

The fashion retailer pointed to a series of geopolitical and economic setbacks that dented its results, notably Russia’s invasion of Ukraine last February. That prompted H&M to close its 181 Russian stores, with analysts estimating the decision cost the company around 5% of its global sales.

The war also helped fuel inflation, increasing raw-material and logistical costs. The strong dollar also hurt the company, which sources most of its products in Asia through dollar purchases. 

As a brand that aims to be affordable, H&M had to be wary of passing cost increases on to customers, Ms. Helmersson said. Still, the company would selectively raise prices on some products in particular markets as conditions demand, she added. 

H&M’s performance stands in contrast to that of rival fashion retailer

Inditex SA,

the owner of the Zara chain. Inditex recently reported a 19% rise in sales for the nine months to Oct. 31, compared with the same period in 2021, with profit up 24%. Both figures were a significant rise on the company’s prepandemic performance.

H&M’s relatively labored recovery points to strategic problems for the company, according to analysts, who say there are few obvious sources of growth available to the company in an increasingly competitive fashion market.

“Sometimes you do need to recognize that the opportunities for growth just aren’t there anymore,” said Simon Irwin, an analyst at Credit Suisse, who forecasts that H&M’s revenues will again fall short of 2019 levels both this year and next. He thinks the company should put more emphasis on growing its profit margin rather than sales. 

Besides losing Russia, H&M has longstanding problems in China, another important growth market. It was boycotted there two years ago after raising concerns about human-rights abuses in Xinjiang and has never fully recovered, especially with Chinese brands now presenting an increasingly strong challenge to mass-market Western rivals.

China is “still a challenging situation,” Ms. Helmersson said, though “gradually we do see step by step that it’s going in the right direction.” The company didn’t disclose specific figures for the Chinese market.

The perception of H&M as a low-cost brand is also being challenged by growing competition from rivals such as Shein and Primark, whose products are typically cheaper.

H&M has already moved to cut costs in a bid to support its profit margin, announcing in November that it would ax 1,500 jobs, or around 1% of its global head count.

The company has also reduced its global store count, from a peak of 5,076 in 2019 to 4,465 in 2022, a 12% decline. Analysts said eliminating underachieving physical stores while investing in successful stores as well as growing online sales is the right approach. Yet H&M could have gone further and faster in paring back its store estate, they said. Inditex, for example, has slashed its store count by 16% since 2018.

Despite the various challenges, Ms. Helmersson, H&M’s CEO, said Friday that the company should see improvement in sales, profitability and inventory levels this year.

Bright spots in H&M’s portfolio included its women’s fashion lines and the Cos brand, Ms. Helmersson said, both of which would provide opportunities for growth. Geographically, there is room to grow in India and Latin America especially, she added. 

Ms. Helmersson said H&M was focused on a target of returning to double-digit operating margins by 2024, up from 3.2% last year.

H&M was investing to improve the agility of its supply chain through digitization, but “the bigger shift right now is to do more near-shoring, to have more production in Europe. That’s already under way,” Ms. Helmersson said. That would help the company respond faster to shifting consumer trends, she said. 

Write to Trefor Moss at Trefor.Moss@wsj.com