H&M Profits Jump, But China Boycott and Rising Costs Slow Path to Recovery

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After a year and a half of intermittent store closures, supply chain disruptions and pandemic-related upheaval, H&M Group’s business is mostly back on track.

On Thursday, the fast-fashion giant reported earnings for the quarter ended Aug. 31, with profits up 19% to 29.6 million Swedish kronor (about $3.4 million) and net sales increasing 9% to SEK 55.59 billion ($6.31 billion). These promising results were weakened, though, by product delays, rising production costs and the company’s ongoing struggles in China, where a labor-rights boycott has severely dented sales.

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Sales in the third quarter were back at pre-pandemic levels in North and South America, Europe and Africa, H&M said, but down 17% year-over-year in Asia and Oceania — a striking plummet given the widespread store closures during the same period in 2020. Currently, 50 of the group’s stores are temporarily shut due to lockdowns and other disruptions, compared with 1,800 earlier this year.

China, once a key growth market for the group, fell off the list of its 10 largest markets, indicating that quarterly sales had dropped below SEK 1.6 million ($182.7 million) from SEK 3.1 million ($354.1 million) for the same period in 2019.

The boycott came after H&M announced its decision to stop sourcing cotton from Xinjiang, a region of China that produces about a fifth of the world’s cotton. The region has come under international scrutiny following numerous reports of Chinese authorities subjecting ethnic Uyghurs and other Muslim minorities there into forced labor and mass internment.

On a call with investors and analysts, H&M Group CEO Helena Helmersson called China “a complex situation” but declined to answer further questions on the topic.

On the call, executives also touted the strong performance of the group’s fall collections so far, but admitted that stock delays and supply chain disruptions have prevented the company from fully meeting demand.

With lockdowns still obstructing production in key manufacturing hubs such as Vietnam and transportation backlogs slowing the movement of goods, the fashion industry has been scrambling to get merchandise onto shelves.

While H&M expects to see increased costs for shipping and raw materials impact its bottom line, executives were optimistic about the state of the group’s supply chain.

“We have a great advantage here by having a global network and supply chain, so we can adjust better than many smaller players,” said Nils Vinge, H&M’s head of investor relations.

“We had some disturbances over the summer in some of the production markets and we’re now gradually improving that,” added CFO Adam Karlsson.

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