H&M’s profit beat needs stronger sales to hold up

What was sustainable — and what was not

The sustainable part of the quarter was H&M’s operating discipline. Selling and administrative expenses fell 1% to SEK 24.83 billion in the third quarter, even as sales edged higher, showing that the group is extracting operating leverage from a more efficient cost base.¹ For the first nine months, selling and administrative expenses declined 4% to SEK 73.59 billion, while operating profit rose to SEK 13.46 billion from SEK 12.03 billion.¹

Management attributed the improvement to purchasing, cost control and more efficient operations. The company is also investing in digital infrastructure, more in-season buying and store productivity improvements.¹ Those are the elements investors can reasonably treat as recurring if execution continues. A leaner store estate, faster allocation and more responsive sourcing can improve full-price sell-through and reduce markdown risk over time.

The less sustainable part was the margin tailwind from tariff and import effects. H&M said third-quarter gross margin rose to 54.0% from 52.9%, but that margin was helped by the 1.6-percentage-point one-time benefit.¹ The same temporary effect also lifted the operating margin by roughly 1.6 percentage points.¹ Reuters later reported that H&M did not expect further tariff refunds, reinforcing the view that investors should not annualize the full third-quarter margin improvement.¹²

That distinction is central to the investment debate. If H&M can hold a roughly 9% operating margin without tariff help while sales grow only 1%, it has made meaningful progress. If future margin gains depend on similar non-recurring items, the earnings base is less compelling.

Sales remain the valuation bottleneck

The larger problem is that H&M has not yet shown a convincing top-line recovery. Third-quarter net sales were SEK 57.19 billion, barely above SEK 57.02 billion a year earlier, while local-currency sales rose 1%.¹ September guidance also points to 1% growth, suggesting no clear acceleration at the start of the fourth quarter.¹

That is a thin cushion in fast fashion, where scale, inventory speed and brand relevance all matter. Reuters reported that Western Europe, H&M’s largest market, declined 1% in the quarter, while cost-conscious consumers, Shein and Inditex’s Zara continue to pressure the chain.¹² The same Reuters follow-up noted that H&M’s expected September growth of 1% compares unfavorably with Inditex’s 9% sales growth reported earlier in the month.¹²

Investing.com’s market-reaction report captured the issue bluntly: shares fell despite the profit beat as investors focused on a disappointing sales trajectory, September’s 1% guide and cost headwinds tied to digital infrastructure upgrades.⁹ That reaction is rational. In retail, margin improvement without sales momentum can be read as self-help. Margin improvement with accelerating sales is a stronger sign of brand momentum and operating leverage.

Why investors may discount the beat

The risk for H&M is that European retail investors apply a lower multiple to earnings that appear flattered by refunds or accounting reversals. Analyst reaction compiled by Finwire via Placera also pointed to tariff refunds as a major driver of the earnings surprise, with underlying EBIT described as close to consensus.¹⁵

That matters because H&M’s strategic turnaround is not just a cost story. The company must prove that store upgrades, better logistics, more localized sourcing and faster design-to-shelf cycles can translate into higher demand. CEO Daniel Ervér has emphasized efforts to shorten lead times and increase flexibility, including buying more product closer to demand.¹² Those initiatives are strategically sound, but investors will want to see them in sales figures, not just in commentary.

The near-term setup therefore remains cautious. Gross margin may face a tougher comparison once the tariff benefit rolls off, while H&M is still investing in ERP systems, logistics and customer-facing upgrades. If those investments raise costs before they lift revenue, the next phase of the turnaround could look less clean than the third-quarter headline profit suggested.

The investment read-through

For global consumer investors, H&M’s quarter supports a nuanced view. The company is better run than it was, and cost discipline is visible in the accounts. Inventory composition was described as good, though stock-in-trade increased because of higher goods in transit, supply-chain disruption and European logistics consolidation work.¹ Cash flow from operating activities also rose 19% in the quarter, giving management room to keep funding operational improvements.¹

But the equity story still hinges on growth. A retailer cannot cut its way indefinitely to a rerating, particularly when competitors are moving faster and online platforms are reshaping price expectations. The third-quarter numbers show H&M can defend profitability. They do not yet show that it can regain sustained market share.

The market’s message is clear: margin discipline is welcome, but not enough. Until H&M converts operational efficiency into stronger sales growth, investors are likely to treat one-off tariff support as an earnings flatterer rather than a turning point.