H&M, profitability put to test since its best performance since 2015

H&M may have won the battle but it has yet to win the war. This Thursday, the Swedish giant will present its 2019 annual report after a 2018 in which it almost lost the silver medal against Fast Retailing. According to advanced sales data, the company saved last year with its best growth yet, since 2015. However, it remains to be seen how Achilles’ heel, profitability, will perform.  

The group ended 2019 (ended November 30) with a revenue of 232,765 million Swedish kronor (24.3 billion dollars), 10.6% more than the previous year. This is its first double-digit increase in four years, after increases of 6.3% in 2016, 4% in 2017 and 5.2% in 2018.

Consequently, the company has started to reap the benefits of its transformation plan, which began two years ago, the plan involved closures and opening of chains, testing of new store formats, rental, and second hand formats. In addition, the group has rearranged its network of stores with 335 openings and 160 closures in 2019.

However, the company has a pending battle. The company has been shrinking its profit every year for the past three years, after hitting a limit in 2015 with a net result of 20,898 million crowns (2.2 billion dollars).

Since then, the profit of the group has been decreasing with 10.8% in 2016, 13.2% in 2017 and 21.8% in 2018. That said, this trends seems to have begun to back-pedal: in the third quarter of 2019, H&M increased its profit by 24.5%, the first increase since the second quarter of 2017.

As a result, to end the year with this upward indicator, it would have been enough to have earned 3 billion Swedish kronor (360 million dollars) in the last quarter, 3.44% less than what was recorded in the same period of the previous year, which results as feasible.

The group’s margin, which has been declining since 2010, could also recover in 2019. The company has passed a decade from having 62.9% of margin to just 52.7% at the end of 2018. In the 2019 results, symptoms of a slight recover can already be noticed: the indicator rose 0.1 points in the first quarter and 0.5 points in the third, the first ascents since the first quarter of 2017.

The group currently operates with the H&M, Cos, Weekday, Monki, H&M Home, & Other Stories, Arket, and Afound chains, which totaled 4,968 stores in 73 markets at the end of 2018. To end the year with an upward profit, it would have sufficed not to have reduced it by more than 3.4% in the fourth quarter.

Battle for the podium

In 2018, the battle for the fashion giant was tighter than ever. Fast retailing, which in 2017 surpassed Gap by revenue, outranked H&M for a few weeks thanks to exchange rates.

However, everything indicates that this year, the Swedish group will continue the second place. Fast Retailing ended the fiscal year of 2019 (ended in August) with a revenue of 2 trillion yen (21 billion dollars), below the 232 billion crowns (24.4 billion dollars) of H&M, and its plans to surpass the revenue of 2.4 trillion yen (22 billion dollars) in 2020 is still below what the Swedish group reaches today.

From the top to bottom there is still a gap of more than 4 billion dollars: at the head, Inditex, with a revenue of 26.1 million euros (29.1 billion dollars), and at bottom, Gaps which reaches sales of 16.1 million dollars (15.1 billion euros).