H&M Earnings and Reaction

The Swedish fashion brand posted solid sales growth, but with exposure to Russia and China, can that be maintained?

----------------

A good rebound

H&M already reported an 18% increase in sales during their first quarter which ended last month. It shows that it is managing to recover from the pandemic, and brand loyalty hasn't diminished in the interim. But, that data covers the period before the potential impacts of two major issues.

The firm is not shy about courting controversy. The question is whether taking stances that might be seen as political at a cost of sales, will in the long run net better returns from customer loyalty. Early in the quarter, H&M faced backlash in China for refusing to buy cotton from the Xinjiang province. Not surprisingly, the stock price has been off through the beginning of the year.

More challenges ahead

On March 2, H&M closed 150 stores in Russia in response to the invasion of Ukraine. Although on a percentage base, that only represents 3% of the stores the company has. Sales aren't likely to be the biggest problem coming from Ukraine: rather, the increased cost of inflation.

Unlike grocers, clothes retailers typically have a tougher job passing on inflation to consumers. On the other hand, fashion retailers tend to have significantly higher margins. Analysts are likely to be paying close attention to H&M's Operating margin. So far, it has been increasing thanks to reopening post-covid. But with inflation taking a bite, the margin might suffer, and with it the price of the stock.

Post-earnings commentary by the CEO on how the firm plans to address supply costs is likely to be a focus, particularly if executives issue any kind of warning about the outlook of margins. The firm has taken advantage of the pandemic to shift more operations online, but could still face challenges from increased shipping costs.

HM needs a real booster

HM-B has been in a bear market since Aug 18, 21. This year alone, it wiped 30% of its value when it plummeted to a ~2-year low on March 7. It has managed to recover some of its losses after a decent rally to 150 SEK, but that’s now a major resistance level.

Price action is bearish. If we break the low of 125, then further declines to 100 open up. There is interim support at 117. On the flip side, any upward move seems restricted to the 145/150 zone. If bullish momentum takes hold, 158 will become a critical level.

Source: TradingView

Key takeaways

The recent rebound in H&M shares has been in part due to the easing of pandemic restrictions, which allows for more football, while the firm increased its focus on digital initiatives.

Analysts are waiting with bated breath to see how it will address increasing supply costs from both Russia-Ukraine and rising inflation. Its exposure to Russia and China could lead to potential problems and impact the company’s margins.

H&M is courting a lot of controversies lately. Brand loyalty might be one of the only things left in its corner to give the stock a boost.