H&M has ramped up marketing spend in a bid to boost its brand but the returns on that investment have been slow to appear. Its shares, down 11% since the start of the year, fell 1% in early trading in response to the anaemic sales growth and lower profitability.
"Even if we are taking important steps, we are not satisfied with our result in the first quarter," CEO Daniel Erver said in a call with analysts.
"We are still in a high inflation climate where the customers' spending power is limited, so we stay very focused on providing outstanding value for money."
Erver, who has led H&M for just over a year, is trying to turn its fortunes around through better marketing and more fashionable clothes, spending on pop stars like Charli XCX to model its collections as he tries to make the brand more desirable and able to compete more effectively against Zara and Shein.
The company's sales of 55.3 billion Swedish crowns ($5.52 billion) for the December to February quarter, were up 2% in local currencies but below analysts' mean estimate of 55.9 billion Swedish crowns. March sales growth was weaker than the 4% increase reported a year ago.
Sales were slightly weaker in the U.S., the Nordics and the UK in the first quarter, Erver said, while Germany and Poland performed better.
In the U.S., H&M will likely hike prices to mitigate the impact of import tariffs imposed by President Donald Trump, chief financial officer Adam Karlsson told analysts.
"We will follow how competitors do this and we will be very diligent in how we assess that we continue to give relatively better value than anyone else," Karlsson said.
H&M's biggest manufacturing hubs are China, where the U.S. has already placed an additional 20% tariff on imports, and Bangladesh, one of the countries at risk of so-called "reciprocal" tariffs Trump plans to announce on April 2.
Increased discounting, marketing investments and "negative external factors" impacted H&M's profitability in the quarter, with the operating profit margin falling to 2.2% from 3.9% in the same period a year ago.
Markdowns were higher than expected due to a later Black Friday, RBC analysts said.
Erver said the hit to profitability from investments in the brand would be smaller in the second quarter, and improvements to H&M's womenswear product assortment were starting to have a positive effect.
After hosting a string of Charli XCX concerts last year, H&M has continued to invest in big-name brand ambassadors, hiring musicians Tyla and FKA Twigs to model its spring and summer collection launched last week.
The retailer, which also owns brands including Arket, Cos, & Other Stories, and Weekday, has been upgrading stores and sharply reducing its overall number of stores. H&M has 4,213 stores globally, it reported on Thursday, its smallest store footprint since 2016.
($1 = 10.0259 Swedish crowns)
