H&M finally has a more Fashionable Look

The world’s second-largest fashion retailer grew its operating margin for the first time in nearly a decade

By guest author Carol Ryan from Wall Street Journal

The world’s second-biggest fashion retailer is finally figuring out what today’s shoppers want.

Graph and captions courtesy by Wall Street Journal

Almost two years after announcing a radical overhaul of the business, H&M Hennes & Mauritz HM.B +2.79 % said on Thursday that its operating profit increased by 12 % in the 12 months through November compared with the same period the previous year. News that the Swedish company had managed to grow its annual operating margin for the first time since 2010 sent its Stockholm-listed shares up 8 % in morning trading.

H&M, which makes more revenue than any other fashion chain bar Zara-owner Inditex, began to show signs of wear four years ago, when its long-running strategy of opening new stores to drive growth stopped working. Store-based sales declined as consumers in many markets bought more clothing online. H&M was also slower to react to changes in shopping habits than its larger Spanish rival.

Selling more clothes at full price will also boost profits. The three-month period through November was the fifth consecutive quarter where fewer items needed to be discounted—a sign that new designs are winning back customers.

Chief Executive Karl-Johan Persson —grandson of the company’s founder—will step into the Chairman role, to be replaced by Helena Helmersson. This could be an opportunity to overhaul the information shared with investors. Unlike Inditex, H&M does not break out what share of sales happen online. Nor does it disclose how many items bought from its website are collected from and returned to its physical stores—a good measure of how well the business is using its network of shops to keep its last-mile delivery costs down.

For the first time in years, H&M has a convincing new look. More detail on how it has been pulled together would help cement investors’ trust.

Heavy investment in its online offer since then and more fashionable collections are beginning to pay off. Local-currency revenue increased by 6 % in H&M’s latest financial year, even though the number of stores rose just 2%. That compares with 3 % revenue growth with 5 % more stores the previous year.

Operating margins edged up 0.1 percentage points to 7.5 %—a small but significant gain given that margins have fallen every year since 2010, when they were at 22.7 %. There is scope for further improvement now that the costliest phase of its e-commerce overhaul is over. And, savings can be made from physical shops: Leases are up for renewal on one-fifth of the company’s stores this year, allowing H&M to negotiate lower rents or switch to better locations.