H&M, the world’s second-largest fashion retailer, announced a cost-cutting drive worth 2 billion Swedish crowns ($177 million) on Thursday after reporting lower-than-expected profits.

H&M generates the majority of its revenues from Europe and the region has been impacted by record energy prices because of the Ukraine conflict,  while high inflation is also negatively impacting consumer confidence, and consequently households are being forced to slash their spending.

The Swedish conglomerate’s third-quarter pretax profit fell to 689 million crowns ($60.9 million) from 6.09 billion crowns a year earlier, well below the 2.98 billion predicted by five Refinitiv analysts polled.

A large proportion of the savings programme will be driven by simplifying organisational structures and purchasing of lesser tech services, said the company’s CEO Helena Helmersson in an interview. Other goals of the program included less business travel and lower office rents, she added.

According to H&M, the benefits will be felt in the second half of 2023.

H&M stated that a one-time 2.1 billion crown cost for winding down its operations in Russia, announced in July, accounted for roughly half of the profit drop.

Earlier this month, the company reported lower-than-expected sales as consumers cut back on their spending, but that demand had improved late in the quarter.

The retailer said on Thursday that a summer heatwave in many European markets, as well as supply chain delays, weighed on sales.

Meanwhile, rising raw material and freight costs, as well as a stronger US dollar, resulted in significant cost increases.

“Overall, these factors had a substantial negative impact on profit,” CEO Helena Helmersson said. “We have chosen not to fully compensate for the increased costs, which is reflected in the gross margin.”

She stated that H&M had raised prices in some segments, such as higher-fashion women’s ranges, to varying degrees across markets, and that pricing would continue to be an important tool in dealing with high costs.

“Flexibility in pricing will be the important thing now going forward,” she said in an interview.

“We note significant margin headwinds to come, particularly given the stronger USD relative to EUR, as well as higher energy costs and a loss of high margin Russian business,” Royal Bank of Canada analyst Richard Chamberlain said in a note to clients.

Inditex, the owner of Zara, which has fared better than H&M in the tough market conditions, increased sales in the May-July quarter. However, growth in the Spanish group slowed in the August-September period. 11 period.

H&M said its autumn collections were well received, with sales up 7 per cent year on year in local currencies from Sept. 1-27, the start of its fiscal fourth quarter, compared to a 4 pert cent drop in the third. More favorable weather also helped, according to Helmersson.

She told analysts that markets like Central Europe were weak in the June-August quarter but had improved in September.

Credit Suisse analysts stated, “Despite modest expectations, profitability in the third quarter was significantly lower than expected, and the outlook for margins over the next year continues to deteriorate.”

Next, a British peer, cut its sales and profit forecasts on Thursday, indicating that household budgets will face increased pressure in the coming months.

(Adapted from BusinessOfFashion.com)