H&M is fixing its profits. It still hasn't fixed its sales. The world's second-biggest fashion retailer just posted some of its healthiest margins in years — and the stock fell anyway. The reason is a strange one: H&M made more money on each sale partly by having less stuff on the shelves to sell. That's either smart discipline or quietly managing decline, and this report doesn't fully settle which.
Here's what happened.
The Numbers
(H&M reports in Swedish kronor — SEK — so we've added rough dollar/euro context.)
- Net sales (Q2): SEK 54.8 billion (about $5.75bn / €5bn), down 3.3% from a year ago — and roughly flat once you strip out currency, despite having 3% fewer stores
- Operating profit (Q2): SEK 5.91 billion — flat year-on-year, and below the SEK 6.38 billion analysts expected
- Operating profit excluding one-off costs: SEK 6.59 billion, up 11%, for a margin of 12.0% (versus 10.4% a year ago)
- Net profit (Q2): SEK 3.96 billion, or SEK 2.49 per share (versus SEK 2.48)
- Gross margin: now over 53% on a rolling 12-month basis, up from roughly 49% in early 2023
"Local currency" growth strips out the effect of exchange-rate swings, so it shows the real underlying trend — and here that trend is flat. The eye-catching number is the margin: operating margin (profit as a share of sales) jumped to 12% before one-off costs. So H&M is keeping more of every krona it earns. The catch is that the total number of kronor coming in barely moved.
Margins Up, Sales Flat: The Whole Story in One Line
For two years H&M has been on a profitability rebuild — cutting costs, buying smarter, and running leaner inventory. It's working: gross margin has climbed from about 49% to 53%, and return on capital has roughly tripled since 2023. This quarter is more proof the plan is real.
But sales aren't growing. CEO Daniel Ervér admitted they came in "somewhat lower than planned," and gave a revealing reason: H&M cut its inventory so aggressively that it sometimes couldn't meet customer demand. Empty rails don't sell clothes.
"Inventory" is all the unsold stock sitting in warehouses and stores. Carrying less of it is great for profit — less money tied up, fewer markdowns to clear leftovers. But push too far and you lose sales you could have made. H&M is walking that tightrope, and this quarter it leaned a little too far toward "lean." Management itself said it needs better balance between availability and demand.
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Get the free extensionWhy the Stock Fell on "Good" Margins
Shares slipped around 2.6% despite the margin progress. The reason: investors looked at the headline operating profit (SEK 5.91 billion), saw it miss the SEK 6.38 billion target, and looked past the fact that a SEK 679 million restructuring charge dragged it down. Strip that one-off cost out and profit actually rose 11%. But the market also saw flat sales and guidance that June sales would again be roughly flat — and decided the recovery still looks "unbalanced."
A "one-off" or "restructuring" cost is a one-time charge — here, the cost of reorganising parts of the business — that won't repeat every quarter. That's why companies show profit "excluding one-off costs": it's meant to reflect the ongoing business. Investors weigh both, but a headline miss plus flat sales is usually enough to send a stock down regardless of the asterisks.
The Real Battle: Shein Below, Zara Above
This is the part that matters if you actually shop there. H&M is stuck in the awkward middle of fast fashion. Below it, ultra-cheap online players like Shein compete relentlessly on price. Above it, Zara (owned by Inditex) dominates the faster, more on-trend, slightly pricier end — and keeps doing it better. H&M is being squeezed from both directions.
Its response is less about price and more about reach and quality: expanding in Latin America (first store in Paraguay this year, Argentina in 2027), launching in the US through Nordstrom, and pushing its premium brand Arket into new markets. The bet is that a more profitable, more premium H&M can carve out the middle rather than get crushed in it.
Retailers hate being "stuck in the middle" — not the cheapest, not the most desirable. You end up losing budget shoppers to discounters and aspirational shoppers to trendier rivals. H&M's strategy is to climb slightly upmarket and protect its profits while it figures out how to grow again.
The Bottom Line for Investors
H&M has become a much more profitable company. Whether it can become a growing one again is the open question.
↑ Why This Matters (Bull Case)
The turnaround is structural, not luck. Gross margin up from ~49% to 53%, operating margin recovering strongly, return on capital roughly tripled since 2023, EPS rising, and cash flow up double digits. Management is choosing profit discipline over chasing low-quality sales. If H&M can re-ignite top-line growth on top of this leaner, higher-margin base, profits could step up meaningfully — and the shares look reasonable against their own history.
↓ Why This Might Worry You (Bear Case)
Sales have been sluggish for a while and are still flat-to-down. Some of the margin gain came from simply having less to sell, which is a diet, not a growth engine. Shein is winning on price and Zara is winning on speed and style, leaving H&M squeezed in the middle. Flat June guidance points to no quick rebound. A more profitable business that can't grow its sales can quietly become a value trap.
H&M has proved it can make more money. The question it still hasn't answered is whether it can sell more clothes.
References
- H&M Group — Six-Month Report 2026 (June 25, 2026)
- Reuters / RTÉ — H&M Reports Q2 Profit Miss as Tighter Inventory Hit Sales (June 25, 2026)
- WWD — H&M Q2 Sales Flat, Focus on Profitability (June 25, 2026)
Ticker: HM-B (Nasdaq Stockholm) · Reported: June 25, 2026
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