By Dominic Chopping


STOCKHOLM--Hennes & Mauritz made a weak start to its third quarter and cautioned that its profitability target for the fiscal year has become more elusive as raw materials and currencies will have a more negative impact in the second half than expected.

At 7829 GMT H&M shares were down 13% at SEK169.

"The most important prerequisite for achieving our goal is that sales growth is further strengthened in the second half of the year compared with the second quarter increase," said Chief Executive Daniel Erver.

The Swedish fashion retailer is targeting a 10% operating margin in fiscal 2024 and analysts have for some time questioned the attainability of reaching the target this year as the company has struggled to gain sales traction amid lower consumer buying-power, rising costs and fierce competition from low-cost, fast-fashion online rivals such as Shein as well as its larger, more traditional rival, Zara.

It reported a margin of 11.9% in the fiscal second quarter to the end of May, versus 12.9% expected by analysts at Jefferies.

The company said sales in June are expected to fall 6% in local currencies on the year as unstable weather in many of its large markets had a negative impact on sales at the start of the month, though sales recovered as the weather normalized at the end of it.

Analysts at HSBC had expected flat to negative mid-single-digit sales growth in June due to a tough basis of comparison. Sales between 1-27 June last year increased 10%, driven by favorable weather trends.

"The real challenge is that 3Q started very poorly," Bernstein analyst William Woods said in a note to clients. "Management have also softened their tone on the 10% margin target and given their excuses early."

Woods said that H&M needs to see sales pick up significantly in order to achieve a 10% margin.

Discounting played a neutral role in the quarter compared to last year, with the company saying the cost of markdowns was flat, but discounts costs are expected to increase slightly in the third quarter as the retailer tries to entice more customers and drive sales.

"The most important prerequisite for achieving our goal is that sales growth is further strengthened in the second half," Erver said.

H&M is working through a cost and efficiency program to save 2 billion Swedish kronor ($189.1 million) a year as it works toward lowering prices for customers and achieving its margin target. The remaining parts of the program were implemented in the first half and costs of implementing it have now essentially been taken, the company said.

The company reported a net profit of SEK5.01 billion for the quarter to May 31 compared with SEK3. billion a year earlier as sales rose 3.5% to SEK59.61 billion.

Analysts polled by FactSet had expected net profit of SEK5.34 billion on sales of SEK59.6 billion.


Write to Dominic Chopping at dominic.chopping@wsj.com


(END) Dow Jones Newswires

06-27-24 0425ET