External factors
Entering 2022, we had left the worst of the negative effects of the pandemic behind us and were off to a good start with well-received collections, increased full-price sales and lower markdowns. Then war broke out in Ukraine, which quickly made us decide to pause sales in the countries affected, make donations in support of Ukraine and eventually wind down our business in Russia and Belarus. This affected many of our colleagues in a negative way and we did our utmost to provide support. The consequences of our decision also had a significant negative impact on our results, since Russia was an important and profitable market for us.
Our results were further impacted by the high inflation, which led to increased costs for freight, raw materials and energy. In combination with a historically strong US dollar, the costs for purchases of goods increased substantially. Rather than passing on the full increase to our customers, we chose to strengthen our market position further.
To further counter the cost increases and at the same time address the major shift that is continuing in our industry, we carried out extensive work to prioritise various initiatives and review our organisation. In the autumn we therefore initiated a cost and efficiency programme, which is expected to have positive effects in the second half of 2023. We are very mindful of the fact that our colleagues are affected by this, and we are doing everything we can to support those concerned.
The lower profit for the year compared to 2021 is mainly explained by the negative external factors that affected our purchasing costs, loss of the operating profit from Russia and a one-time cost for the cost and efficiency programme. This was most evident in the fourth quarter, when the combined negative impact of these factors amounted to around SEK 5 billion compared with the same quarter in the previous year.
Further integrated sales channels
Our portfolio of around 4,500 stores worldwide is a great asset for us. In combination with our digital sales channels, our stores enable us to meet our customers when, where and how they want.
We are continuously optimising the store portfolio to make sure we have the right store with the right format in the right place in each market. This means that we have closed some stores, mostly in established markets, opened new ones in growth markets, and also refurbished and rightsized store areas. At the same time, we continued the integration of our physical and digital sales channels, which strengthen and complement each other.
To ensure additional capacity and flexibility between our sales channels as well as improved availability for our customers, we continued to invest in tech, AI and our supply chain. By using AI and data across the entire supply chain, we can improve customer satisfaction by ensuring better precision in our quantification, allocation, pricing, personalisation and local relevance – all while contributing to leaner production and more sustainable use of resources.
Our approach to sustainability
Sustainability is an integral part of our business. This is underlined by our 2030 goal, which combine targets for company growth and profit with reductions in greenhouse gas emissions.
To reach our ambitious climate goals of halving the group’s greenhouse gas emissions by 2030 and achieving net-zero by 2040, we invest in projects to reduce greenhouse gas emissions throughout our whole value chain. During the year, our climate goals were verified by the Science Based Targets initiative and we established the Green Fashion Initiative to support our suppliers in replacing fossil fuels. We also signed long-term virtual power purchase agreements in the UK, Sweden and Spain to cover electricity consumption in our operations in a majority of European markets. This will not only help us reduce our greenhouse gas emissions, but also secure our energy prices.
Our sustainability work was recognised by, among others, the Dow Jones Sustainability World Index for the 11th consecutive year. As one of only 12 global retail companies in the index, we are assessed as a leader in environmental, social and governance performance.
Investments in sustainability provide the group with long-term business opportunities. By building strategic partnerships with key stakeholders and growing in various innovative ways such as circular business models, we can grow our business in a way that decouples our financial growth and profitability from the use of finite natural resources. A good example of this is majority-owned fast-growing Sellpy, which is already one of the biggest players in second-hand fashion in Europe.
Our investment arm CO:LAB is a way for us to explore new business models, and in addition to Sellpy we have invested in startups such as Smartex, Renewcell and Colorifix, to mention just a few. Our investments have in a short time created significant value, for example by improving the customer experience and enabling scaling and commercialisation of recycled and more sustainably sourced materials.
We will continue to make investments in new business models, materials and technologies that have the potential to drive radical shifts in how we make and remake our products, and how our customers can experience fashion. Alongside these efforts, we will keep working for increased levels of transparency to empower customers to make more informed decisions about the products they buy.
Outlook
Looking ahead, our main focus is on continuing to invest in and develop our customer offering and shopping experience for our unique brands, so that we keep meeting and exceeding our customers’ needs and expectations.
Despite the turbulent world around us, H&M Group stands strong with a wide customer base, a robust financial position, healthy cash flow and a well-balanced inventory. Sales in 2023 have started well, showing that we can grow even in troubled times and when customers’ purchasing power is diminishing. We expect the external factors that have negatively affected our purchasing costs to gradually reverse and become positive in the second half of 2023.
Our financial strength and long-term approach enable us to continue investing, and we are increasing capex from SEK 7 billion in 2022 to SEK 10 billion in 2023. All factors combined, there are very good prerequisites for 2023 to be a year of increased sales and improved profitability. Thus, our goal of achieving a double-digit operating margin for full-year 2024 remains in place. We see great potential for future expansion – despite our size, we can still grow and prosper further in new and existing markets.
This is all thanks to the commitment from colleagues all around the world, who continue to build our company, stand true to our values and ensure we always realise the business idea that our founder laid the ground for 75 years ago – to deliver our customers unbeatable value with the best combination of fashion, quality, price and sustainability.
