H&M beats profit forecasts in Q3, expects bigger tariff hit in current quarter

H&M (ST:HMb) reported stronger-than-expected third-quarter operating profit of 4.91 billion crowns, achieving an 8.6% operating margin and 2% local currency sales growth, marking a rebound after earlier profit declines. However, the fashion retailer issued a cautious near-term outlook, noting flat September sales and anticipating that U.S. tariffs will negatively impact its fourth-quarter gross margins.

Analysis

H&M reported a significant rebound in its third-quarter performance, with operating profit of 4.91 billion crowns substantially outpacing the 3.68 billion consensus forecast and marking a strong recovery from profit declines in the first and second quarters. The result translated to an improved operating margin of 8.6%. While top-line growth in local currencies was modest at 2%, reported net sales in Swedish crowns were negatively impacted by approximately five percentage points due to adverse currency translation effects from a stronger krona. This positive operational result is tempered by a cautious forward-looking stance from the company. Management noted that sales in September were flat year-over-year in local currencies, citing high comparative figures, and explicitly warned that U.S. tariffs are expected to weigh more heavily on gross margins in the fourth quarter. Despite these headwinds, the company's operational health shows a positive sign with cash flow from operating activities improving to 9.98 billion crowns.

Key Decisions for Investors

• Investors should weigh the strong Q3 earnings beat and margin recovery against the cautious guidance, which signals potential headwinds for revenue and gross margins in the fourth quarter.
• Monitor upcoming monthly sales figures closely to determine if the flat performance in September is an anomaly or the start of a decelerating trend in consumer demand.
• It is prudent to model the potential impact of U.S. tariffs on Q4 gross margins and consider the ongoing risk of currency fluctuations, which materially affected reported sales this quarter.