H&M Increases Margins Despite Weak European Demand

H&M delivered a mixed set of second-quarter results for fiscal 2026. Sales remained under pressure as shoppers across Europe spent less because of inflation and higher living costs. Even so, the fashion retailer improved its profitability through better cost control, lower inventory levels, and reduced discounting. While revenue growth stayed weak, the stronger margin performance shows that H&M is prioritizing quality earnings over aggressive sales growth, an approach investors continue to monitor closely.

H&M Improves Margins Even as European Consumer Demand Stays Weak

H&M reported second-quarter operating profit of SEK 5.91 billion, or about $606.5 million, compared with analysts’ average estimate of SEK 6.38 billion. Although the profit missed expectations, it remained broadly stable from a year earlier. Reuters reported that weaker consumer demand across Germany and the United Kingdom weighed heavily on quarterly performance.

Gross margin improved to 56.6%, up from 55.4% a year ago. The increase reflected tighter inventory management, fewer markdowns, and better sourcing efficiency, helping offset slower sales growth.

Why did margins improve while sales stayed weak?

The answer is simple. H&M focused on selling more products at full price instead of relying on discounts. At the same time, inventory levels fell 10% year over year, reducing excess stock and supporting higher profitability.

H&M Faces Soft Sales Across Europe Despite Cost Discipline

Sales during the March to May quarter remained roughly flat in local currencies, while June sales are also expected to stay unchanged compared with last year. Management admitted that quarterly sales came in below internal expectations.

Europe remained the weakest region for H&M. Germany and the United Kingdom experienced softer customer demand as inflation, rising household expenses, and energy costs continued to pressure consumer spending.

Could tighter inventory have limited sales?

Yes. H&M acknowledged that lower stock levels created product shortages in some categories. While inventory discipline supported margins, it also prevented the company from fully meeting customer demand during the quarter.

H&M Continues Brand Investment and Global Expansion Strategy

Excluding restructuring costs, operating profit increased about 11% year over year, showing that the retailer’s core business remains stronger than the headline numbers suggest. The quarter included SEK 679 million in restructuring expenses related to office layoffs.

H&M plans to open 90 new stores and close 170 stores during 2026. The company is also investing in logistics, digital operations, and inventory systems while expanding into markets including Brazil, El Salvador, Venezuela, and Paraguay. Marketing campaigns featuring well-known fashion collaborations and celebrity partnerships remain part of H&M’s strategy to strengthen customer engagement and improve brand appeal.

Final Analysis: What H&M’s Latest Results Mean for Investors

H&M’s latest earnings highlight a business that is becoming more efficient, even as demand remains challenging. The improvement in gross margin to 56.6%, combined with a 10% decline in inventory, shows management is successfully controlling costs and reducing unnecessary discounting. However, flat sales, softer demand across Europe, and an operating profit of SEK 5.91 billion, below the SEK 6.38 billion market forecast, remind investors that revenue growth is still a challenge. The planned store optimization, digital investments, and international expansion could support future earnings. Investors should closely watch consumer demand in Europe, inventory availability, and sales momentum over the next two quarters to determine whether stronger margins can eventually translate into sustainable revenue growth.

Disclaimer

The content shared by Meyka AI PTY LTD is solely for research and informational purposes. Meyka is not a financial advisory service, and the information provided should not be considered investment or trading advice.