^{Photo: The Business of Fashion}

Swedish fashion retailer H&M saw its stock climb 4.4% on Thursday after reporting signs of a summer demand recovery, even as its second-quarter sales fell short of expectations. The world's second-largest apparel company is now weighing potential price hikes to counter the impact of rising trade tariffs and production costs, particularly from the U.S.–China supply chain tensions.

A Summer Boost After a Sluggish Start

H&M revealed that June sales are projected to rise 3% year-on-year in local currencies, offering a much-needed sign of momentum following a lackluster start to the fiscal year. The positive outlook provided a temporary lift to investor confidence, though concerns about long-term performance remain.

The company acknowledged that consumers remain cautious, with CEO Daniel Erver highlighting continued price sensitivity due to economic uncertainty.

“We are seeing some of our competitors raise prices, and we’re actively evaluating similar steps to remain competitive,” Erver stated on an earnings call.

U.S. Tariffs and Supply Chain Exposure

While H&M stopped short of detailing the financial impact of U.S. tariffs, it acknowledged the growing pressure they pose. With the United States being H&M’s second-largest market, and its supply chain heavily concentrated in Asia—particularly China and Bangladesh—the company is closely monitoring the 90-day pause on new levies set to expire in July.

“There are opportunities to adapt, given the flexibility in our supply chain,” the company said in a written statement, suggesting that pricing and logistics adjustments could help mitigate future disruptions.

Quarterly Financials: Below Forecast but Stable Margins

For the three months ending May 31, H&M reported:

• Revenue: 56.71 billion Swedish krona ($5.99 billion), slightly below the 57.01 billion SEK forecast by analysts
• Local currency sales: Up 1% year-over-year
• Operating profit: 5.9 billion SEK, in line with analyst estimates, though down from the same period last year

The company said higher purchasing costs—driven by a stronger U.S. dollar and elevated freight rates—had a negative effect on margins, though Erver expressed optimism that those external pressures are starting to ease.

“The factors that hurt our first-half margins are now trending positively,” he noted.

Store Closures and Expansion Strategy

In a broader strategic update, H&M announced plans to:

• Close 200 stores in 2025, primarily in mature markets
• Open 80 new stores in high-growth regions

This pivot reflects the company’s effort to streamline operations while tapping into emerging consumer markets, particularly in Asia, Eastern Europe, and Latin America.

Competitive Pressure Intensifies

H&M continues to face mounting competition from rivals like Inditex (Zara) and ultra-fast fashion platforms such as Shein and Temu. Despite its global scale and multi-brand strategy—featuring Cos, Arket, and Weekday—H&M has experienced several consecutive quarters of soft sales.

Earlier this year, it reported a weak start to 2024, followed by a modest sales increase in March. Meanwhile, Inditex also posted disappointing quarterly results, citing similar issues with tariffs, consumer caution, and macroeconomic headwinds.

Sector-Wide Struggles

H&M's challenges reflect broader issues in the retail industry. According to a recent report by law firm Weil, Gotshal & Manges LLP, retail and consumer goods have become the most distressed sectors in Europe, driven by:

• Tight credit markets
• Persistent inflation
• Sluggish consumer demand
• Rising input and transport costs

This pressure is forcing retailers to rethink pricing strategies, streamline inventories, and reassess geographic expansion.

Final Thoughts

H&M’s slight sales rebound and ongoing tariff strategies underscore the complex balancing act facing global fashion retailers. While summer demand may offer temporary relief, the path forward is marked by geopolitical uncertainty, intensified competition, and changing consumer behavior. The company’s ability to adapt pricing and operations across markets will be crucial in determining whether it can reclaim momentum in the second half of the year.

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