H & M Hennes & Mauritz AB (publ) (HMB) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the H&M Group 9 Months Report 2026 Webcast and Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Joseph Ahlberg, Head of Investor Relations. Please go ahead.

Good morning, and a warm welcome, everyone. Today, we present the third quarter results for 2026 for the H&M Group. My name is Joseph Ahlberg, and I'm Head of Investor Relations. Before I hand you over to our CEO, Daniel Erver, I'd like to share this morning's setup. Daniel will start with a brief summary of our results and progress. Then our CFO, Adam Karlsson, will provide some details on the financials. And after that, Daniel will share a brief outlook. We will then open up for a Q&A session, where Daniel, Adam and I will be available to answer your questions. With that, please welcome Daniel.

Good morning, everyone, and thank you for joining us today. In the third quarter, we continued to strengthen the H&M Group. We delivered a strong operating profit and a return to growth. The operating margin for the quarter reached 10.6%, and this includes a positive one-off effect of approximately 1.6 percentage points relating to tariffs and import of goods that increased the cost of goods sold in previous quarters. The improvement is clear. Looking at the 12 months, the operating -- rolling 12 months, the operating margin is now at 9% versus 7.2% for the same time last year. I'm happy to see that our summer offer has been well received and that it contributed to sales improvement, particularly towards the second half of this quarter. Overall, net sales increased by 1% in local currencies, while there were still somewhat affected by logistic disruptions. For September, we expect a sales growth of 1% compared with the same period last year. And before we dive in the more progress from the quarter, I'd like to share some of the fashion highlights from this quarter in this short video. So please enjoy. [Presentation]

Our strategic priorities remain product, experience and brand. Here is where we can make the biggest difference for our customers. Every day, we compete for customers' attention and we need to deliver at our best, deliver the most relevant experience in every touch point, whether it is in 1 of our digital channels, in some of our flagship stores across the globe or in any of our stores across the world. So to support these priorities, we further strengthened a number of key enablers. We continue to develop our sourcing capabilities. We are empowering our teams closer to our customers, and we are becoming increasingly data-driven to support better and faster decisions across the business. We are not yet where we want to be, but step up Step by step, we are firmly building a faster and more flexible and customer-focused H&M. With a growing share of in-season buying and shorter lead times, we increased our flexibility and our ability to respond to changing customer needs and trends. This way, we can improve the precision of our offering, create more attractive assortment and increase the share of full price sales. To deliver even greater value for money, we also continue to invest in product quality and durability. Delivering a stronger customer offer requires progress across the entire value chain. And as our organization of fewer layers comes into place, we empower our colleagues to make decisions closer to our customers in all our 82 markets. In parallel, the investments we make in data, technology and AI to strengthen our ability to become more efficient in product design, sourcing and product flow, but it also helps us to become more personalized across our different touch points. We want to make a real difference in how our customers experience H&M in stores and online. Our omni model is a fantastic platform. It allows us to continue to build strong and direct relationships with our customers. And as we invest in the most attractive locations, we closed the least productive ones and we upgrade existing stores and expand into new markets. We continue to improve the productivity of our store portfolio. We also continue to invest in technologies that helps and improves the customer experience and the way we operate our stores. Through the extended use of RFID technology and the extended rollout of self-checkout, we make it easier for our customers to find what they're looking for and complete their purchases. Together with a more relevant assortment in each store and increased personalization across our digital channels, these efforts create a more relevant and seamless customer journey for all of our customers. To further strengthen our brands and deepen customer engagement, we continue to combine in-house design with strategic collaborations and partnerships. On the left-hand side of your slide, you see how H&M showed up even stronger this year at the London Fashion Week last Thursday night. With a high impact on reach in social media, presenting our in-house autumn/winter collection ready to buy right away, creating lines outside our flagship stores all across the world on Friday. And this autumn comes with a line of really exciting collaborations such as Wardrobe NYC. What you see here in the middle, Elie Saab, as you can see on the right, and H&M Homes [ Kelly Weasler ] collaboration, where we're making great fashion and design accessible to more customers. We are also evolving the way we build our brands and connect with our customers by growing our digital and create led approach to marketing. By increasingly working with digital creators and more authentic content, we can reach a broader audience while remaining relevant to different customer groups. This helps us build stronger engagement and bring our fashion to live with trusted voices. I will now hand over to Adam for a deeper look at the financial numbers. Adam, please go ahead.

Thank you, Daniel, and good morning, everyone. As Daniel highlighted, net sales developed in a positive direction in the quarter and increased by 1% in local currencies. If we look at the year-on-year numbers, we growth in the Nordic region supported both by a stronger consumer environment and also improvements, of course, in our customer offering. In local currencies, sales grew in all regions, except Western Europe. And here, market conditions continued to be affected by cautious consumers and a high level of promotional activity, particularly in Germany and the U.K. It is also positive to see that portfolio brands returned to growth as sales increased by 3% in local currencies. We have seen a continued solid profit development in the quarter. The gross margin came in at 54.0% and as I said, it included a positive one-off effect of approximately 1.6 percentage points related to tariffs and goods imports. In addition, and as a reminder, last year, we had a positive impact on the gross margin development related to exchange rate movements on the group internal receivables and liabilities. Taken together and adjusting for these 2 effects, the underlying gross margin continued to improve year-over-year, and that reflects the long-term improvements we've made in our sourcing. External factors have ever had a slightly negative impact, and that was driven by higher cost for transportation, while markdowns were in line with previous year. So thanks to good cost control, but with higher costs related to the upgrade of our digital infrastructure, selling and administrative expenses decreased by 1% in the quarter, both in Swedish krona and local currencies. So if we look at the longer-term picture, the improvement in profitability and our operational foundations are clear signs of progress in building a stronger and more resilient H&M group. As you can see here in the graph to the left, we have continued to improve our operating margin on a rolling 12-month basis, reaching 9% with the support from a gross margin of 54.4% and bringing us closer to our long-term operating margin target of 10%. The main drivers behind this improvement have been better sourcing, strong cost control and more efficient ways of working across the business. Moving then to the right-hand side of the slide, key value drivers such as return on capital employed and earnings per share are also continuing to improve. Return on capital employed by 18% and EPS by 23%, both on a rolling 12 months. This reflects on only stronger profitability but also a business that is deploying capital more effectively. And key levers are here a more integrated supply chain, a higher share of in-season buying and a closer collaboration across our channels. And while our work with inventory productivity continues, our inventory value increased by SEK 1.4 billion by the end of the third quarter compared to last year and important that this should be seen in the context of more goods in transit as a result of the disruptions in both global supply chains and the temporary effects related to the consolidation of the European logistic network. And as a reminder as well, we had prudent buying for the U.S. during the second half of 2025. So let me give you a brief recap of our financial outlook before I hand back to you, Daniel. For the fourth quarter, we expect external factors to have a somewhat negative impact on gross margin compared with the same period last year. And this is then driven by higher transportation costs, as already seen in Q3. markdowns are expected to be somewhat higher in the fourth quarter than the same period last year, and this is primarily driven by expectation of a high promotional activity in November and the calendar effect of Cyber Monday falling into Q4 this year. And in addition to that, the inventory levels ending Q4 are affected by goods being shifted into the operating balance for Q4 as a result of the delays in Q3 this year. And as I already mentioned, the prudent buying in the U.S. for the second half of last year. Turning to SG&A. We have demonstrated a solid cost control throughout the year and based on the outcome with 1 quarter remaining, we are narrowing our full year guidance for SG&A growth in local currencies to at the lower end of the guided range. On CapEx, we have many ongoing projects expected to add to CapEx in Q4, and that gives a back-heavy activation profile. Our current prediction is that we will end up at the lower end of the guided CapEx range for the fiscal year. And then finally, on cash flow, a mentioning of that the majority of the remaining provisions recognized in the second quarter of 2026 are expected to be settled in the fourth quarter. And with that, I'll hand back to you, Daniel, for a short business outlook.

Thank you, Adam. We have done a great deal over the past few years to build the foundation for a stronger and more resilient H&M Group. And our focus remains firmly on product, experience and brand. Through these priorities, our ambition is to create an even greater customer value and continue to strengthen our customer offering. To achieve this, we are step-by-step increasing the speed and the precision across the value chain. We do this in our supply chain, while we give our colleagues more mandate to act. We are becoming more data-driven, and we are scaling up the use of AI. We have more work to do, but we are encouraged by the progress that we are making, and we are very grateful and I'm very grateful for the team who works really hard every day to make H&M stronger. And we remain confident that the initiatives that we are putting in place will continue to strengthen our customer offering over time. With that, thank you so much for listening, and I will now hand over to Joseph and the Q&A.

Thank you, Daniel. We will now start the Q&A. Please state your name before asking a question and try to limit yourself to 1 question at a time with a maximum of 2 questions per participant, so we can answer them 1 by 1 make sure that we have time to answer all of your questions. Over to you, operator to finish the questions, please.

[Operator Instructions] And your first question today comes from the line of Magnus Raman from SB 1 Markets.

So I have 2 questions. And starting with the first one, the dynamics of your ERP investments. So because you have been delivering impressive cost control here 9 months to date. And then the question is if you still stand by your expectation of single-digit increase in SG&A in local currencies for the full year. And also, if you could elaborate a little bit on the effects you expect to result in Q4 and also for along the projected extra cost from ERP rollout will continue.

Good morning, Adam here. So we still stand by our guidance, but we sort of narrow the range then to somewhat above last year. So low single digits, so to say. So that is the still expectation. We are has also mentioned, focusing more towards the second half of the year on this ERP work that we do. So that will most likely still affect the SG&A for the full year to that extent. And also looking into the coming years, then this will not be done by the end of the fourth quarter this year. It will be a continuous work throughout '27 and also into 2028. So that is why we also speak about that we need to continue to of course, focus on the positives of it, but also be realistic that this will be a component of our financial plan for next year that is likely then to have tick on the SG&A also for 2027.

Right, now has become low, but still the implicit sort of effect in Q4 should be quite sizable from how I calculate it if you're going to reach a positive figure there. Nevertheless, okay, the second question here is about what you mentioned here also in the report about disruptions in your supply chain and that you have experienced during the quarter. And maybe you could also comment on your own consolidation of your European logistics network. When do you expect that to be finalized? So the first is what type of disruptions you have experienced and the second part, when you expect to be finalizing your own consolidation efforts?

So this is Daniel. We see 2 different types of disruptions. One is related to the global supply chains, a lot related to the situation in the Middle East where we get disruption and the latest on global shipping supply chain lines, as well as the ability to use air freight is compromised by the situation. So that meant that we had some delays of goods that was supposed to be delivered in Q4 coming into Q3. Some delays of goods within Q3 and then some delays of goods. And then we've round deliveries of goods into Q4 to mitigate for these delays, which is the explanation of the year-over-year increase of on the stock levels. The second disruption related to what you mentioned, the consolidation of our European warehouses, and that's an ongoing work that will continue. We've had during the second quarter, the third quarter and summer checked in the beginning of the fourth quarter effects related to the closure of our warehouse in Belgium, and that has affected mainly Southern Europe, and we had somewhat of an effect of the performance top line in the third quarter -- in the beginning of the fourth quarter, but we are now catching up, and we are now sort of seeing that those effects should wear out during the rest of the fourth quarter.

And your next question today comes from the line of Daniel Schmidt from Danske Bank.

Can you just maybe touch on the full year sales effect from the store optimization that you're doing is still expected to be slightly positive for the year. I think it was slightly negative in the first half. What was the outcome in Q3? And if that was negative, I guess that leaves a lot to be happening in Q4. Is that the way we should interpret it?

No. So the net effect that we guide for the full year is the effect from openings, from closures and as well as stores that are being closed for rebuilds during period of time. The net effect for the second half of the year is slightly positive. So we had a slightly positive effect in the third quarter from that optimization work that we see will also happen in the fourth quarter.

And should we read it as that you had a slight positive in Q3, you mentioned that is that going to be more than a slight positive in Q4 then in order to compensate for the slight negative in H1?

I will see a similar level to what we saw in Q3, but we estimate the effect for the year to be slightly positive.

Okay. Good. And then you guide, of course, on external factors but you don't mention internal factors that we have talked quite a lot about in terms of consolidating the supply base and Tier 1 and Tier 2 suppliers and the effects that you've gotten out of that. Then you mentioned that a quarter ago, I think, or 2 quarters ago that, that's still going to be -- it would be peaking in H1, but it was still going to be a positive effect for H2. Is that still the fact?

That work continues, and I believe we spoke about it also in last quarters actually that we're sort of moving that process backward in the supply chain to also more clearly, include material suppliers and further down in the supply chain. So that work continues. What we have also communicated is that we have sort of a at least a medium-term target range of the gross margin. And as we are now on a rolling 12 basis starting to operate within that, we are starting to more clearly use the internal effects to also add value to the products, so to say, to reinvest that opportunity. So it will be less sort of of gross margin expansion driver, but of course, an important part to continue to create strong value for the customer.

And mitigate the pressure on extend factors.

Yes, of course, yes.

Yes. And what is still a positive effect from it in.

A slight, slight positive effect mitigating the negative parts and our continued efforts and the results of those efforts in our own sourcing operations.

We will now go to the next question, and the question comes from the line of Fredrik Ivarsson from ABG Sundal Collier.

Yes. Maybe brief follow-up on the latest question. You obviously have done a bunch of good work on the gross margin side with the supplier optimization program and so on. How much of this is yet to be done? Do you see more upside and more potential in that sense?

We continue to, as Adam mentioned, to see further opportunities also going into the material side of it. We see more opportunities for consolidation. So the supply -- the sourcing work will continue to be a very important piece of how we mitigate the negative effect of the -- on the external factors as we move ahead. But as Adam also mentioned, we are now in the gross margin into well, which we see as a sustainable interval, which will sort of gear towards staying in for the rest of the year as we mitigate external factors, but also invest in the private offering. Then looking forward, we also look at the different supplier base, and we are shortening the lead times. And when we look at suppliers with shorter lead times, a bigger part of the gain comes not from the both gross margin, but from the realized margin from sales by having a higher sell-through as well on full price and that would be more important for us as we move ahead with a higher share of closed market and fast source product and assortment.

Perfect. And then if you could comment on where you are in terms of the new, more flat organization are all those processes in place? And what have your sort of initial reflections been?

So we have had a couple of go-lives across the world depending local regulations and what's possible. So the first batch went live in the beginning of summer. We had another majority going live coming into the autumn. So to the very vast extent, we are now live with the new organization across all our markets with 1 or 2 markets still being the exceptions. We see that already that is really positive that we have eyes and ears looking for potential and identifying opportunities in our offering in the way we set up our stores, the way we operate our business close to customers across the 82 markets. And it is an opportunity for us to combine the strength of a global company and all the muscles we have with the local relevance. So we are starting to see early positive indications of being more close to the customer to be more relevant. But then, of course, a large organizational change means that we are putting new teams in place. There is sort of a start-up phase. The teams that are getting to know the markets that weren't placed in the market before. So of course, there is a start-up lag to it also. But when it comes to the implementation, we are more or less fully there with the new organization.

And your next question today comes from the line of Niklas Ekman from DNB Carnegie.

Can I ask about the external factors. When you talk about some negative effects in Q3 and you see something similar about Q4. Can you elaborate at all on the magnitude I guess, both for Q4 and I guess, coming quarters as well, are you seeing the negative effects from Q3 worsening in Q4 and kind of going into H1 of 27 or is it about the same level?

This is Joseph speaking. For Q3, we saw that external factors added up to a net negative effect of that was somewhat worse than expected. And this -- the main driver of this development was the increased freight costs year-over-year. That was the main moving factor explaining the development for the third quarter. And our guidance for Q4 is for markdown to also then increase somewhat year-over-year. And it's the added freight cost, that is the key driver here. So that the comment we make about similar development as what we saw there in the third quarter. Then, of course, we will we expect to also see material prices creating a headwind towards the end of this year, but coming into more effect into 2027.

Okay. But there's no dramatic shift in the coming quarters with the headwinds increasing. It's still a fairly similar magnitude as Q3.

That is a fair summary, yes.

Very good. And also talking about markdowns, when you worn off slightly higher markdowns now in Q4 and you're highlighting Cyber Monday, is that the only reason for higher markdowns? Or is there anything in your inventory that -- or general campaign activity? And kind of as a follow-up on that, I guess the timing of Cyber Monday should also be positive for sales. And I think last year, you lost 1 percentage point of sales in Q4. So all else equal, you should possibly gain 1 percentage point of sales in Q4 this year?

So I'll start with the markdown. It is -- the main effect is the shift of Cyber Monday. Then as we mentioned, due to the global supply chain disruptions, we've had delays of incoming, which is not optimal the timing, we want the garments to arrive at the right time for -- to be really relevant for the customers. So we have an increased stock level to manage also due to that. That stock is very fresh because the stock that was brought to come in, in Q3 that was slightly delayed during Q3 or slightly [ preponed ] into Q4 to mitigate, but it's also -- it's a stock level that we will need to manage during the quarter. That is partially affected and coming from the global disruptions and the delays. Adam, I don't know if you want to elaborate on the calendar effect further.

No. But you're right that it will be 1 more day sort of say, of selling in November this year compared to last year. So that other things equal, should be somewhat positive on the financial 2026.

I think the estimate impact you mentioned there, Niklas is probably on the high side. So a positive for November, but not a significant impact on the quarterly sales outlook coming from that Cyber Monday falls into November this year.