The world’s second-largest apparel retailer, H&M, underperformed expectations with flat sales for its most recent quarter as it battled fierce competition from Inditex, the owner of Zara, and other brands.

Shares of H&M dropped more than 4% after the firm revealed that local currency sales for the months of June through August, the most highly watched indicator, were “flattish” year over year, missing the 5% growth predicted by analysts in a Reuters poll.

Analysts claim that H&M, which competes in the mid-market, is being pressured from both sides by Zara, which appeals more to aspirational consumers, and by Shein, a fast-fashion retailer, and Primark, which undercut its prices.

Everyone is watching to see if H&M, which also owns Weekday, Arket, Cos, Monki, and Other Stories, can increase its profit margins. The company stated that it prioritised profitability throughout the quarter and that attempts to meet its target of a 10% operating margin in 2024 were “going in the right direction.”

According to a study of UK apparel pricing released at the end of August by RBC analysts, H&M has become comparatively more expensive this season as a result of this strategy.

According to Jie Zhang, an analyst at AlphaValue, “whether H&M is able to turn its margin back is most important in the near-term.”

Shares of the Swedish company have increased by about 50% this year as sales have increased and a cost-cutting initiative announced last year has begun to pay off, but fierce competition has taken a toll.

H&M has failed to pass on cost increases to customers through increased prices, whereas Inditex raised prices early and invested in marketing to boost the profile of its Zara brand, such as by collaborating with fashion photographer Steven Meisel.

On Wednesday, Inditex exceeded expectations with a 40% increase in half-year net profit despite slowing the rate of price hikes.

However, Inditex’s sales between August 1 and September 11 fell short of analysts’ projections, and shares in the Spanish business dipped marginally, indicating that the scorching in Europe had hurt demand for autumnal clothing.

H&M’s net sales increased by 6% to 60.9 billion Swedish crowns ($5.45 billion), falling short of the analysts’ forecast of 63.5 billion.

H&M’s sales increased 8% in Swedish crowns when its operations in Russia, Belarus, and Ukraine were excluded. In order to sell goods before closing them permanently, H&M opened its Russia stores from August to November of last year.

Following the Russian invasion last year, H&M stated it will start reopening its stores in Ukraine in November.

(Adapted from reuters.com)