H&M profit jumps 23% as cost cuts work but sales growth remains stuck at 1%

H & M Hennes & Mauritz AB (Nasdaq Stockholm: HM B), the Swedish global fashion retailer, increased third-quarter operating profit by almost 23% to SEK6.04bn even as sales rose only 1% in local currencies, highlighting the growing gap between the company’s improving cost structure and still-subdued top-line momentum. Net sales reached SEK57.19bn compared with SEK57.02bn a year earlier, while the group operated with approximately 2% fewer stores.

Operating profit comfortably surpassed the SEK5.14bn average forecast in an LSEG analyst poll, while gross margin widened to 54% from 52.9%, ahead of the roughly 53.4% consensus expectation. H&M attributed its stronger profitability to purchasing improvements, cost control and more efficient operations, although approximately 1.6 percentage points of quarterly gross margin reflected one-time effects associated with tariffs and goods imports.

The market nevertheless focused on the weaker half of the equation. H&M expects September sales to increase only 1% in local currencies, suggesting that the substantial profit improvement has not yet translated into an equally convincing acceleration in customer demand.

How did H&M increase profit so sharply with almost flat reported sales?

The mathematics begins with gross margin. H&M generated SEK30.87bn of third-quarter gross profit, up from SEK30.14bn, while gross margin increased by 1.1 percentage points to 54%. Selling and administrative expenses simultaneously decreased 1% to SEK24.83bn.

That combination creates powerful operating leverage. Revenue barely changed in Swedish-krona terms, but H&M retained more gross profit from each unit of sales while spending less on overhead. Operating margin consequently expanded to 10.6% from 8.6%.

Part of that improvement is temporary. H&M says one-time effects related to tariffs and goods imports added approximately 1.6 percentage points to the quarterly margin. Investors therefore should not mechanically assume that a 10.6% operating margin will repeat under identical sales conditions.

The underlying direction is still significant because administrative spending fell and management’s purchasing initiatives appear to be improving the economics of merchandise sourcing. CEO Daniel Ervér has made profitability and operating efficiency central priorities since taking the role in 2024.

For a fashion retailer, however, there is a limit to how far cost efficiency can carry earnings without stronger sales. Once easy efficiencies have been captured, sustained profit growth generally requires more customer transactions, higher prices, better product mix or some combination of the three.

Why is H&M trying to buy more fashion closer to the selling season?

Ervér said H&M is increasing the share of merchandise purchased in-season so that it can respond faster to fashion trends, customer preferences and increasingly unpredictable weather. The change tackles one of fast fashion’s most difficult operational problems: deciding months in advance what shoppers will want when products finally reach stores.

Ordering too much too early creates markdown risk. If styles miss a trend or weather arrives differently than expected, inventory may have to be discounted aggressively, reducing gross margin and consuming store space.

Ordering closer to demand improves flexibility but places different pressure on suppliers and logistics. H&M needs shorter lead times and reliable production capacity if it wants to make later purchasing decisions without leaving shelves empty.

The company is therefore trying to become faster without reproducing the exact operating model of digital-first rivals. Shein built much of its competitive position around exceptionally rapid testing and replenishment of small product batches, while Inditex has long used a tightly controlled supply chain to move Zara products rapidly from design to stores.

H&M’s purchasing reforms are important because they address competition at the operating-system level rather than through a single celebrity collaboration or seasonal collection.

What do H&M’s nine-month numbers say about the turnaround?

For the first nine months of fiscal 2026, H&M reported net sales of SEK161.62bn, down from SEK169.06bn in reported currency but unchanged in local currencies. Operating profit nevertheless increased to SEK13.46bn from SEK12.03bn, lifting the operating margin to 8.3% from 7.1%.

Net profit for the nine-month period rose to SEK8.77bn from SEK7.75bn, while earnings per share increased to SEK5.53 from SEK4.86. Operating cash flow improved 17% to SEK26.52bn.

Those figures confirm that the margin recovery extends beyond a single quarter. H&M is generating more profit and cash despite a revenue base that has not expanded meaningfully in local currencies.

That is both encouraging and limiting. It proves management can improve the economics of the existing sales base, but it also explains why the market continues looking for a stronger demand signal.

A sustainable fashion turnaround normally needs both halves: healthier margins and renewed sales growth. H&M has made substantially more progress on the first than the second.

Is H&M’s inventory position becoming a new risk?

Stock-in-trade reached SEK39.36bn at the end of the quarter compared with SEK37.94bn a year earlier. H&M said the increase reflected a higher value of goods in transit resulting from global supply-chain disruption and temporary effects associated with consolidation of its European logistics network.

Inventory deserves close attention in fashion because unsold merchandise loses economic value unusually quickly. Last season’s design can require substantial discounting even when the physical garment remains perfectly usable.

Management says the composition of inventory remains good, which reduces immediate concern. Still, investors should compare inventory growth with future sales growth because stock rising substantially faster than demand can eventually pressure markdowns.

The company’s decision to purchase a greater share of fashion in-season may ultimately help by making inventory responsive to actual demand. The transition itself can create logistics complexity, however, particularly while H&M simultaneously consolidates parts of its European distribution network.

Strong cash flow gives the company room to manage that transition. The next test is whether inventory normalises without sacrificing availability of products customers actually want.

Why did H&M shares fall despite beating profit expectations?

H&M’s B shares declined 2.02% to SEK162.85 on September 24 after the report and fell another 0.77% to SEK161.60 on September 25. That left the shares below their SEK166.20 close immediately before results despite operating profit substantially exceeding consensus.

The reaction indicates that investors valued the sales outlook differently from the profit beat. September’s expected 1% local-currency growth suggests that the revenue acceleration required for a more complete turnaround remains elusive.

Competition explains part of the concern. H&M faces digitally aggressive players such as Shein and a highly efficient Inditex, while consumers can switch fashion spending easily between brands and channels. Reuters noted that investors have been waiting for evidence that the profitability improvements under Ervér will be accompanied by stronger sales growth.

The quarter therefore contains two very different narratives. H&M has demonstrated that better sourcing, cost control and operational efficiency can materially improve earnings. It has not yet demonstrated that those improvements have made customers buy significantly more.

That makes sales growth the next decisive metric. If better product availability and faster in-season purchasing lift demand while today’s cost discipline remains intact, the margin turnaround can develop into a broader earnings-growth story. If sales remain around 1%, H&M will eventually run out of costs to cut faster than revenue grows.