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H&M slumps as rising costs and Russia exit take their toll

Shoppers enter and leave the H&M store
H&M said it is looking to cut costs after its exit from Russia, and due to higher costs for clothing and transport. Photo: Press Association

H&M (HM-B.ST), the world’s second biggest clothing retailer, fell out of fashion with investors on Thursday after it revealed a 89% slump in third-quarter earnings.

The company said it is looking to cut costs by 2 billion Swedish kronor (£165m, $180m) annually after its exit from Russia, and due to higher costs for clothing and transport.

Pre-tax profit came in below expectations at 689m crowns during the three months, instead of the 2.1bn initially forecast. This was also less than the previous year’s figure of 6.09bn crowns during the same period a year ago.

This included a one-off cost of 2.1bn crowns related to the retailer's exit from Russia following the invasion of Ukraine. Its gross margin fell to 49% from 53.2% the previous year.

H&M added that the strength of the dollar is making clothes more expensive to source, while the industry continues to battle declining footfall, due to the rising cost of living, and rising energy costs.

Shares opened around 7% lower on the day on the back of the news, bringing the stock close to an 18-year low. It has since pulled back to trade around 3.5% lower, at the time of writing.

“Sky-high inflation, squeezed household budgets, sliding consumer confidence and one-off costs from exiting Russia have created a perfect storm for H&M’s profitability which fell sharply along with margins,” Victoria Scholar, head of investment at Interactive Investor, said.

“Earnings are in stark contrast to its rival Inditex (ITX-U.TI) which enjoyed a surge in profits in its forecast-topping first half earnings this month thanks to its strong working capital management.

“Investors have had a difficult time this year with H&M’s shares lately which are down 45% year-to-date and down 50% over the past five years with shares sharply under pressure again today.”

Read more: Pound slides again as Carney accuses Truss of 'undercutting' Bank of England

It came as fashion chain Next issued its second profit warning this year. Britain’s bellwether cautioned that the UK faces two cost of living crises as sterling weakness (GBPUSD=X) compounds rocketing inflation and soaring energy bills.

Next said the decline in the pound looked set to prolong inflation, even once producer prices start to come down.

The retailer has already indicated that clothing prices would rise by around 6% this autumn due to higher factory gate and freight costs as UK inflation hovers near 40-year highs.

Watch: How does inflation affect interest rates?