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H&M to cut costs due to weaker-than-expected profits

After reporting weaker-than-expected profits, H&M launched a cost savings drive worth SEK 2 billion Swedish (USD 177 million). Various factors have contributed to the reduced profits, not only is consumer confidence in the brand down in Europe, where H&M is based, energy prices and inflation are also increasing exponentially which has led to a general curtailing of discretionary spending in many households.

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In the third quarter, the Swedish group’s pretax profit dropped to SEK 689 million (USD 60.9 million), down from 6.09 billion in the previous year, and well below the 2.98 billion that analysts had expected.

H&M’s CEO Helena Helmersson claimed that the company’s savings program would be achieved in part by simplifying its structure and buying fewer IT services in a statement to Reuters. She also said less business travel would be undertaken and the company would reduce its office rent.

H&M faced an instrumental one-off cost of SEK 2.1 billion in the process of closing down its Russian business. The announcement came in July and accounted for almost half of the company’s profit drop. Despite the reported sales being lower-than-expected, H&M claims that sales and general demand for their products was increasing late in the quarter.

Source: H&M

The retailer also cites the European summer heatwave in and supply chain delays as factors that negatively impacted their sales. In addition, they faced substantial cost increases in the price of raw material and freight, as well as the challenges presented by a stronger U.S. dollar.

Analysts at Credit Suisse claimed that “despite modest expectations, profitability in 3Q was significantly worse than expected and the outlook for margins over the next year continues to deteriorate.”

In an interview Helmersson explained the company’s choice, “we have chosen not to fully compensate for the increased costs, which is reflected in the gross margin”

She continued, “flexibility in pricing will be the important thing now going forward.”

Reuters reported that H&M raised prices in some segments, including high-fashion women’s wear, to a varying extent across markets, and that pricing would remain key to reducing costs.

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Inditex, which owns retailer Zara, which has fared better than H&M in the tough market conditions, increased sales in its May-July quarter. As a result of better weather and a strong fall collection, H&M’s sales for its fiscal fourth quarter were up 7 percent over last year in local currencies against a 4 percent drop in the third quarter. Furthermore, markets such as central Europe were weak in the June-August quarter, but are recovering in September.