H&M beat profit expectations today — operating profit came in ahead of forecasts, margins improved for the third consecutive quarter, and the CEO sounded confident about the direction of the business.
The stock fell nearly 5%.
That gap between the results and the reaction tells you everything about where H&M is right now. The profitability story is getting better. The sales story still isn't.
Here's what happened.
The Numbers: Profit Beat, Sales Missed
- Net sales: SEK 49.6 billion (~$4.7B) — down 9% in SEK due to currency translation, down 1% in local currencies
- Gross margin: 50.7% — up 160 basis points year-over-year. Beat expectations.
- Operating profit: SEK 1.51 billion — beat analyst forecast of SEK 1.39 billion, up from SEK 1.20 billion a year ago
- Operating margin: 3.0% — up from 2.2% last year
- EPS: Beat forecast of 0.4273 USD
- Inventory productivity: Highest level in 10 years
- March 2026 outlook: Sales expected up 1% in local currencies
TranslationH&M reports in Swedish kronor (SEK), but sells clothes in euros, dollars, and pounds. When the Swedish krona strengthens against those currencies, the numbers look worse in SEK even if actual trading is fine. That's what happened here — a 9% negative "currency translation effect" made the headline revenue number look much worse than the underlying business. Strip that out and sales only fell 1%, which is much less alarming. It also explains why the stock reaction can seem disconnected from the operating reality.
Why Profits Are Rising While Sales Are Falling
This is the central puzzle of H&M right now, and it's worth understanding properly.
For the past two years, CEO Daniel Ervér has been focused on one thing above everything else: making H&M more profitable, not bigger. That means closing underperforming stores (around 4% fewer stores versus last year), cutting inventory, negotiating better with suppliers, and reducing markdowns. The result is a gross margin that's been climbing steadily — from 49.1% a year ago to 50.7% now — and operating profit that's beaten expectations for three consecutive quarters.
The trade-off is that sales growth has been sluggish. Fewer stores means less revenue. Tighter inventory means less discounting, which some customers respond to by shopping elsewhere. And Europe's consumer environment has been genuinely weak — particularly Germany, H&M's biggest single market, where demand has been muted for most of the past year.
Translation"Gross margin" is the percentage of each sale H&M keeps after paying for the product itself. If H&M sells a dress for €30 and it cost €15 to make, the gross margin is 50%. The higher this number, the more efficiently the business is running. H&M's gross margin improving from 49.1% to 50.7% means they're keeping more from each sale — through better supplier deals, less discounting, and smarter inventory management. That's real progress. The question is whether they can also get more people through the door.
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Get the free extensionThe Supply Chain Turnaround
The most interesting detail from today's results is how H&M is winning on margins. It's not primarily from cutting costs in the traditional sense — it's from rebuilding how the supply chain works.
H&M can now get a garment from design to shelf in 4-6 weeks for their fastest-moving lines. They've consolidated suppliers, building deeper partnerships with around 30 strategic partners who can move quickly and flexibly. Inventory levels are at a 10-year high in terms of productivity — meaning they're selling more of what they make, with less left over at the end of the season.
This matters because unsold stock is expensive. You either have to discount it heavily (hurting margins) or write it off entirely (hurting profits). Getting closer to the right product in the right quantity at the right time is the single biggest lever H&M has on profitability.
Translation"Nearshoring" — which came up in the earnings call — means moving production closer to where clothes are sold. Instead of manufacturing everything in Asia and shipping it to Europe, H&M is increasingly producing faster-moving lines in Europe and Turkey. It costs slightly more per garment but it means they can react to trends in weeks rather than months. For a fashion business where being six weeks late can mean a product no longer sells, that flexibility is worth paying for.
The Consumer Environment
H&M's CEO was candid about the headwinds. European consumers — particularly in Germany, which accounts for 15% of H&M's sales — have been under sustained inflationary pressure for years. They're more cautious, more selective, and more likely to respond to promotions.
This is creating a tension at the heart of H&M's strategy. On one hand, Ervér wants to reduce discounting and move H&M towards a more premium, full-price positioning. On the other hand, some of H&M's customer base is actively looking for deals, and ignoring that risks losing them to Shein, Primark, or Zara.
The answer so far: be more precise about which customers in which locations need promotions, rather than discounting everything everywhere.
The US, interestingly, has been a bright spot. Consumer demand there has been stronger than H&M expected going into 2026 — and H&M has actually been supply-constrained rather than demand-constrained in the US market.
TranslationThe de minimis exemption — a US trade rule that previously let low-value packages enter duty-free — was removed, which hit Chinese ultra-fast fashion players like Shein hardest. H&M believes this has shifted some demand back towards more traditional retailers in the US, which is why American consumers have been stronger than expected. It's one of the few genuine tailwinds in the business right now.
What's Coming Next
H&M's long-term gross margin target is 54-55%. They're at 50.7% now. The CEO was explicit that they don't intend to keep pushing margins beyond that target range — instead, any further improvement from external factors (currency, shipping costs) will be reinvested into better products and competitive pricing.
The second half of 2026 will bring higher technology costs as H&M rolls out new infrastructure, which will put some pressure back on costs. But the underlying supply chain improvements are expected to continue supporting efficiency.
The next significant catalyst is the reopening of H&M's flagship Stockholm store on Hamngatan on April 10 — a symbolic moment for a brand trying to prove it can still be culturally relevant.
The Bottom Line for Investors
H&M beat profit expectations for the third consecutive quarter. Margins are improving, inventory is under control, and the supply chain transformation is delivering real results. The US is stronger than expected, and March is tracking positive.
↑ The Bull Case
Three consecutive quarters of profit beats is not a coincidence — it's evidence that Ervér's turnaround plan is working. Margins are heading towards the 54-55% target. Inventory is leaner than it's been in a decade. The US consumer is resilient. And the removal of de minimis in the US is reducing pressure from ultra-cheap competitors. The stock trades at a significant discount to Inditex (Zara's parent), which seems excessive if H&M can demonstrate sustained sales recovery alongside margin improvement.
↓ The Bear Case
Sales fell 1% in local currencies — in the company's seasonally weakest quarter. European consumer confidence remains fragile, particularly in Germany. Promotional activity is still needed to drive footfall in key markets. Tech infrastructure investment in H2 2026 will increase cost pressure. And the gap between improving profitability and flat-to-declining sales can only persist for so long before investors start asking whether the top line will ever recover.
The margin story is real. The sales story still needs to be written.
References
- H&M Group — Three-Month Report Q1 FY2026 (March 26, 2026)
- Investing.com — H&M Q1 2026 Earnings Call Transcript (March 26, 2026)
- Reuters — H&M Q1 operating profit grows more than expected, sees March sales up 1% (March 26, 2026)
Ticker: HM-B.ST (Nasdaq Stockholm) · Reported: March 26, 2026
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