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Consumer Staples
H&M, the Swedish fast-fashion behemoth, has faced a significant decline in profitability during the first quarter of its financial year 2025. This downturn is largely attributed to "negative external factors" and a notable increase in markdowns of its products. Despite a modest rise in sales, the company's net profit halved compared to the previous year, signaling a challenging period ahead for the retail sector.
H&M reported a 3% increase in turnover in Swedish kronor, reaching 55.3 billion SEK, while sales in local currencies rose by 2%[1][3]. However, the gross margin dropped from 51.5% to 49.1%, reflecting a decline in profitability due to increased markdowns and investments aimed at enhancing the customer offering[3][5]. The operating profit plummeted by 42%, landing at 1.2 billion SEK, down from 2.1 billion SEK the previous year[1][3].
The decline in H&M's profitability is significantly influenced by external factors, including currency fluctuations. The strengthening of the Swedish krona negatively affected the company's gross margin, as it resulted in less favorable currency conversions[3][5]. Additionally, the later timing of Black Friday in the fiscal year 2025 led to increased logistics costs and markdowns, further exacerbating the profitability issues[2][4].
In response to these challenges, H&M is embarking on strategic measures to revamp its operations and improve profitability:
H&M is optimizing its store portfolio by closing underperforming locations and focusing on large flagship stores. The company closed a net of 40 stores in the first quarter, with plans to close 190 more throughout the year, primarily in established markets[1][3]. This move aims to concentrate resources on more profitable locations and enhance the shopping experience for customers.
The company is also investing heavily in its digital presence. Online sales continued to grow, making up around 30% of total sales. H&M's revamped digital store has been well-received by customers, following its rollout in additional markets[1][3]. This digital push is part of the company's omni-channel model, which integrates physical and digital sales channels to offer a more seamless shopping experience.
H&M is focusing on strengthening partnerships with strategic suppliers to improve margins. This approach is expected to yield positive effects in the second half of the year by enhancing both the customer offering and profitability[4].
Despite the current challenges, H&M remains cautiously optimistic about its future prospects. The company expects the negative impacts from external factors, increased markdowns, and investments to diminish in the second quarter[3][4]. CEO Daniel Ervér emphasized that H&M is prioritizing long-term growth by improving product offerings, enhancing the shopping experience, and strengthening its brand identity[5].
H&M is also concentrating on sustainability, an area where it has traditionally been strong. In a market increasingly crowded with competitors, the brand sees sustainability as a key differentiator, particularly for appealing to Gen Z consumers who prioritize environmental impact[5].
The fast-fashion sector is highly competitive, with players like Zara and Uniqlo continuously evolving their strategies. H&M, while maintaining a broad loyal customer base, faces challenges in redefining its brand positioning compared to its sister brands like COS and Monki, which have clearer identities[5].
H&M's latest financial results underscore the broader challenges in the retail industry, where companies are grappling with external pressures and changing consumer behaviors. As H&M continues to navigate these challenges, its focus on digital expansion, strategic partnerships, and sustainability may prove crucial in restoring profitability and competitiveness in the fast-fashion market.
With plans to adjust its store portfolio, enhance its digital offerings, and emphasize sustainable practices, H&M aims to strengthen its brand and maintain its position as a leading player in global fashion. Whether these strategies will yield the desired outcomes remains to be seen, but they reflect the company's commitment to adapting to a rapidly evolving retail landscape.
