Analysts covering H&M warn about high inventory and mounting foreign sourcing pains

New York - Hennes & Mauritz Group (H&M) reported a 6 percent increase in local-currency sales for the second quarter. However, many analysts covering the Swedish fashion retailer’s shares warned about the company’s mounting excess of inventory and pressing margins could worsen in the second half of 2019.

H&M said Monday local-currency sales over the March-May period rose by 6 percent, beating Bloomberg’s polled analysts’ estimates. However, the group’s quarterly figures imply a slowdown in growth over the April – May period when compared against the same period a year ago.

Analysts at Bernstein, who currently recommend hold on to H&M stock, said the figure suggested an improved product offering was starting to gain traction, but added that “Despite this we assume full earnings later in June will detail marked gross margin attrition - forex sourcing pain, reduced markdowns recovery - with opex inflation remaining elevated and leading to more operating profit margin pain.”

Meanwhile, RBC analyst Richard Chamberlain, with a “sector perform” rating on the world’s second-largest apparel group’s shares, said H&M probably gained share in key markets, outperforming among others Gap which has suffered in a challenging U.S. market.

Chamberlain added that inventories probably remained high at the end of the quarter, and cautioned that sales comparisons become more challenging in the third quarter. Loyalty scheme roll-outs and other investments, as well as costs for store closures, had probably squeezed margins in the second quarter, he said.

H&M will publish its full second-quarter earnings report on June 27.