H&M's quarterly sales stagnate as it feels heat of competition

By Marie Mannes

STOCKHOLM (Reuters) -H&M reported on Friday flat sales for its most recent quarter, lagging expectations as the world's second-biggest fashion retailer struggled in the face of intense competition from Zara-owner Inditex and others.

H&M shares fell more than 4% after the company said June-August local-currency sales, the most closely watched figure, were "flattish" year-on-year, missing the 5% growth forecast by analysts in a Reuters poll.

By 0800 GMT the stock was on track for its worst day in six months.

H&M is in the mid-market and analysts say it is being squeezed on both sides - by Zara which is appealing more to aspirational shoppers, and by fast-fashion retailer Shein and Primark which are beating it on price.

All eyes are on the ability of H&M, which also owns Arket, Cos, Monki, & Other Stories, and Weekday, to improve its profit margins. The company said efforts to achieve its goal of a 10% operating margin in 2024 were "going in the right direction," and that it prioritised profitability during the quarter.

In a sign of that strategy, H&M has become relatively more expensive this season, RBC analysts found in a survey of UK apparel pricing published at the end of August.

"Whether H&M is able to turn its margin back is most important in the near-term," said Jie Zhang, an analyst at AlphaValue.

The Swedish company's shares have gained around 50% this year as sales rose and a cost-cutting drive announced last year started to bear fruit, but intense competition has taken a toll.

While H&M has struggled to pass cost increases on to shoppers through higher prices, Inditex raised prices early and spent on marketing to elevate its Zara brand, for example by working with fashion photographer Steven Meisel.

Inditex beat expectations on Wednesday with a 40% jump in half-year net profit even as it slowed the pace of price increases.

But in a sign that the heatwave in Europe had dented demand for autumn clothes, Inditex's sales between Aug. 1 and Sept. 11 fell short of analysts' expectations and shares in the Spanish company fell slightly.

H&M's net sales rose 6% to 60.9 billion Swedish crowns ($5.45 billion), lagging the 63.5 billion expected by analysts.

Excluding its Russia, Belarus and Ukraine operations, H&M's sales rose 8% measured in Swedish crowns. H&M opened its Russia stores from August to November last year to sell stock before closing them permanently.

H&M has announced it will begin reopening stores in Ukraine in November, after they were closed last year following Russia's invasion.

($1 = 11.1635 Swedish crowns)

(Reporting by Marie Mannes, Additional reporting by Helen Reid, editing by Terje Solsvik, Jason Neely and Susan Fenton)