Swedish fashion retailer H&M delivered a better-than-expected first-quarter profit on Thursday but saw its shares slide sharply after issuing a warning that a prolonged Middle East conflict could deal a significant blow to consumer spending — complicating an already fragile sales recovery and deepening competitive pressure from Zara and discount Chinese rivals.
H&M’s operating profit for the December-to-February quarter rose 26% year-on-year to 1.51 billion Swedish crowns ($162 million), ahead of the analyst consensus of 1.39 billion crowns compiled by LSEG. The result marked a third consecutive quarter of rising profits. The operating margin improved to 3.0% from 2.2% the year before, while gross margin expanded by 160 basis points to 50.7%, driven primarily by internal supply chain improvements and inventory discipline that pushed stock productivity to a ten-year high. Despite those internal gains, shares fell as much as 6.6% as investors focused on the revenue picture, with sales in local currencies declining 1% for the quarter and the group guiding for just 1% growth in March.
The sales weakness was partly structural. H&M closed a net 80 stores during the quarter as part of a portfolio rationalisation programme, with 160 further closures planned across 2026 and around 80 new openings, resulting in a slightly negative sales drag in the near term. The Americas region underperformed, with sales down 3% in local currencies, highlighting persistent competitive pressure in the mid-market apparel segment. Online continued to perform well, accounting for just over 30% of total sales — a share the group is targeting to grow.
The war-related outlook overshadowed the operational progress. Chief executive Daniel Erver said H&M had not yet observed a material deterioration in demand but cautioned that a sustained conflict would compound inflationary pressures on a consumer base that is already financially stretched. He noted that elevated energy costs would amplify household cost-of-living pressures, potentially producing a secondary demand shock across the retail sector. H&M’s exposure to direct war-related cost disruption is relatively contained — the group has minimal direct sales presence in the Middle East, where operations are conducted through franchisees, and transports the majority of its goods by sea and land rather than by air, limiting its vulnerability to airspace closures. However, the broader inflationary transmission through energy and freight markets presents a systemic risk that no mass-market retailer can fully insulate itself from.
British retailer Next, which reported results on the same day, has already provisioned £15 million in additional costs attributable to the conflict — covering fuel and air freight charges — on the assumption that disruption lasts approximately three months. Next warned that if costs persist beyond that window, it would begin passing them through to consumers as higher selling prices, with clothing price increases of between 4% and 10% possible by September. The parallel warnings from two of Europe’s largest fashion groups in a single trading session marked an escalation in the retail sector’s public acknowledgement of war-related risk.
H&M’s challenge runs deeper than the war. The group occupies a structurally difficult position in the global fast-fashion hierarchy — its customer base is regarded as more price-sensitive than Zara’s, leaving it exposed to substitution from ultra-cheap platforms such as Shein on one side and losing aspirational shoppers to Inditex’s brands on the other. Alphavalue analyst Jie Zhang described the March sales guidance as somewhat disappointing given the positive reception management had attributed to the new spring collections, while Inderes analyst Lucas Mattsson said he did not expect strong sales growth in 2026, noting that no clear positive trend had yet emerged from the data. RBS analyst Richard Chamberlain acknowledged the steps H&M has taken to improve its offer but said the recovery remained unbalanced, adding that a double-digit operating margin target was achievable over time but would require simultaneous improvement across multiple variables — a combination the group had not yet consistently demonstrated.