Early trading on Wednesday saw a 14% increase in H&M shares as the Swedish retailer substantially exceeded analyst estimates for its fiscal first quarter’s earnings.

Operating profit exceeded analysts’ estimates of 1.43 billion Swedish krona ($196 million) by 2.08 billion, according to an LSEG survey. The company maintained its goal of an operating margin of 10% this year, and as a result, its operating margin increased to 3.9% from 1.3%.

In the first quarter, net sales decreased year over year to 53.7 billion krona from 54.9 billion krona.

Prior to this, H&M had said that it will prioritise profitability in response to increasing competition from Chinese fast fashion companies like Shein and Inditex, the owner of Zara.

“Development continued in the right direction in the first quarter with an improved gross margin and operating profit, lower inventory and strong cash flow,” said H&M Group CEO Daniel Ervér, who joined the company at the start of the year after the surprise resignation of Helena Helmersson.

Ervér stated that increasing sales was the company’s primary aim during a conference call with analysts after the results were released. According to a Reuters story, prices are anticipated to drop by the end of 2024 compared to the beginning of the year.

The quarter saw a 7% year-over-year decline in inventory. The company has long struggled with an accumulation of extra unsold product, so cutting this inventory has been a top priority.

The firm announced on Wednesday that H&M’s board plans to request approval for the buyback of its B shares and to recommend a dividend of 6.5 krona per share at the company’s May annual general meeting.

Jefferies analysts noted that the quarterly results included a “sizeable gross margin beat” of 51.5% in addition to a “mixed top line delivery.”

Positive sales momentum in the early spring/summer season gave the company’s 10% operating margin objective credibility, the Jefferies note continued.

The price of H&M’s shares has fluctuated recently; it fell 37% in 2022 before rising 57% in 2023.

(Adapted from Reuters.com)