By Helen Reid

LONDON (Reuters) – Swedish style retailer H&M (ST:) is underneath strain to show to traders it could actually flip its fortunes round and fend off fierce competitors from fast-fashion rivals akin to Zara, whose gross sales are rising, and China-founded Shein, set to go public this yr.

H&M, which bought greater than $22 billion in clothes and niknaks in its 2023 monetary yr, goals to achieve an working margin of 10% by the top of 2024.

Confronted with falling gross sales, the retailer with round 4,300 world shops is intensifying cost-cutting, prioritising profitability over revenues.

When it reviews full-year outcomes on Wednesday traders need to have the ability to see its pathway to that margin purpose, towards a backdrop of shaky client demand.

H&M’s working margin improved to five.9% on the finish of the third quarter, from 3.9% a yr earlier, however the problem this yr can be to maintain growing margins at a time when many clothes retailers have signaled worth cuts.

Recognized for clothes underneath $15 and $19.99 denims, H&M may tweak its pricing technique this yr to achieve its margin purpose, stated Andreas Lundberg, analyst at SEB in Stockholm. Its “worth combine can be extra essential,” he stated.

“Though the final 10-15 years have been volume-driven for H&M, volumes are additionally very costly to deal with internally, in warehouses, in shops,” Lundberg stated. “Sooner or later you might even see fewer volumes.”

Finances style retailer Primark additionally sees its adjusted working revenue margin recovering to greater than 10% this yr as sourcing prices fall, enabling it to soak up the upper delivery charges pushed by disruptions within the Purple Sea.

Bernstein analysts see H&M and Primark among the many most impacted attire retailers given their larger reliance on Asian sourcing and excessive use of sea freight.

Provided that threat, one other key determine traders will watch is H&M’s stock-in-trade: the quantity of stock the retailer is carrying.

“H&M has managed to lower this quantity considerably and the development continues downwards, which means they’re shortening time from design to manufacturing to delivery,” stated Adil Shah, portfolio supervisor at Storebrand in Oslo, which holds H&M shares.

H&M’s stock-in-trade as a share of rolling 12-month gross sales was 17.1% on the finish of the third quarter, down from 21.6% a yr earlier.

H&M, whose different manufacturers embrace Arket, Cos, Monki, Weekday, and & Different Tales, has been closing shops and shedding employees. On Friday, it introduced a plan to close greater than a fifth of its shops in Spain and lay off as many as 588 employees.

H&M had 701 fewer shops by end-August final yr in contrast with the top of 2019, a decline of 13.8%.

Its cost-cutting has helped enhance investor sentiment. H&M shares are up round 29% from a yr in the past, however with a price-to-earnings ratio of 18, nonetheless commerce at a reduction to Zara-owner Inditex (BME:), whose ratio is roughly 20.8.

Reluctant to fireplace the beginning gun on worth cuts, mass-market style retailers could “wait to see who will transfer first”, stated Alex Romanenko, head of retail at pricing consultancy Pearson Ham Group.

Financial institution of America analysts see attire costs in Europe falling by 2% in 2024, having risen by 4.5% final yr.

($1 = 10.4773 Swedish crowns)