H&M faces investor scrutiny amid fast-fashion competition

H&M faces scrutiny: Swedish fashion giant H&M is gearing up to showcase its strategy for a turnaround and increased profitability as it battles against strong competition from fast-fashion rivals such as Zara and Shein, which is set to go public this year.

With over 4,300 stores worldwide, H&M, having sold more than $22 billion in clothing and accessories in the 2023 financial year, is aiming to achieve a 10 per cent operating margin by the end of 2024. In response to declining sales, the retailer is intensifying cost-cutting efforts, prioritising profitability over sheer revenue.

Investors eagerly await the full-year results on Wednesday, seeking insight into H&M's plan to attain the targeted margin, especially amid fluctuating consumer demand. The operating margin improved to 5.9 per cent in the third quarter, up from 3.9 per cent a year earlier, but sustaining this growth in the face of widespread price cuts within the clothing retail sector poses a challenge.

Adjust the pricing strategy

Known for its affordability, with dresses under $15 and $19.99 jeans, H&M might adjust its pricing strategy this year to align with its margin goal, according to Andreas Lundberg, an analyst at SEB in Stockholm. He emphasises that the "price mix will be more important" in the coming strategy.

Amid higher reliance on Asian sourcing and the challenges of sea freight disruptions in the Red Sea, H&M, along with Primark, is anticipated to be among the most affected apparel retailers. As such, investors will closely monitor H&M's inventory levels, which have shown a significant decrease, down to 17.1 per cent of rolling 12-month sales at the end of the third quarter, compared to 21.6 per cent a year earlier.

Despite closing stores and implementing staff layoffs, H&M's cost-cutting initiatives have improved investor sentiment, with its shares up around 29 per cent from a year ago. However, with a price-to-earnings ratio of 18, the company still trades at a discount compared to Zara-owner Inditex.

While uncertainty looms over potential price cuts in the mass-market fashion sector, analysts anticipate a potential 2 per cent decline in apparel prices in Europe in 2024. The strategic moves by H&M and its counterparts are expected to unfold in response to market dynamics, setting the tone for the fashion retail landscape this year.

(with Reuters inputs)