H&M's Painful Pivot: Strong Profit Progress, Missed Sales Targets, and a Turnaround That Is Working — Just Not as Fast as the Market Wants

The Results at a Glance

H&M Group has released its second-quarter 2026 earnings, and the story they tell is simultaneously encouraging and frustrating — a paradox that captures exactly where Europe's largest fast-fashion retailer finds itself in 2026. The good news is that profitability is meaningfully improving: gross margin in Q2 stood at 56.6 percent, up 1.2 percentage points year-on-year, and half-year net income rose 2.77 percent to 4,667 million Swedish kronor ($478 million). Operating profit for the first half reached 7,425 million kronor ($760 million), up 4.33 percent year-on-year.

The bad news, which the market has greeted with considerably more attention, is that sales continue to disappoint relative to expectations. Q2 net sales fell 3.32 percent on a reported basis in local currencies. For the first half, net sales fell 7 percent. Critically, H&M's own CEO Daniel Ervér admitted that Q2 sales were "somewhat lower than planned" — a quiet acknowledgment that the turnaround, however directionally sound, has not yet translated into the top-line recovery that would signal a genuine strategic breakthrough. On the specific Q2 earnings, H&M booked 679 million kronor ($69.5 million) in restructuring and one-off costs related to its ongoing organisational transformation, a charge that weighed directly on reported profit and that has become the most immediately visible headline number from this reporting period.

Who H&M Is and Why It Matters

H&M Group is, by most meaningful measures, the second-largest fashion retailer in the world. Founded in 1947 in Västerås, Sweden, as Hennes — a women's clothing store whose name simply meant "Hers" — the company expanded rapidly, acquired the sports brand Mauritz Widforss in 1968 (gaining both the menswear range and the "&M" of its name), and over the following decades built one of the most globally recognisable fashion brands on earth. Today the H&M Group employs approximately 98,000 people across more than 4,000 stores in over 75 markets, with a trailing twelve-month revenue of approximately $23.36 billion.

The group is not simply the H&M brand, though that is by far the largest and most visible. Its portfolio includes seven distinct brands positioned at different points on the quality, price, and aesthetic spectrum: the core H&M brand, targeting value-conscious mainstream shoppers; COS, a more minimal, architectural label at a higher price point; & Other Stories, a concept store brand with a strong beauty and accessories range; Arket, the group's most upscale label, described as a "modern market" offering quality-focused wardrobe essentials; Weekday, targeting a younger, streetwear-influenced demographic; Monki, historically the group's most youth-orientated, playful brand; and H&M Home, the homeware division. This multi-brand architecture gives H&M Group strategic options that a single-brand retailer would not have — the ability to grow the premium end of the portfolio (COS, Arket, & Other Stories) even as the core brand navigates a more challenging competitive environment.

The Turnaround: What Daniel Ervér Is Actually Trying to Do

Daniel Ervér, who took over as CEO in January 2023, inherited a business that had been significantly disrupted by a combination of forces beyond any retailer's control — the pandemic, the post-pandemic inflation surge that crushed consumer discretionary spending, and the relentless competitive expansion of ultra-fast-fashion players led by Chinese platform Shein. But he also inherited a business with structural problems it had created itself: too many stores in the wrong locations, too much inventory managed too loosely, an organisational structure that was too complex and too slow to respond to market signals, and a supply chain that was generating adequate but not exceptional gross margins relative to its global scale.

The turnaround strategy Ervér has been executing rests on four interconnected pillars. The first is store portfolio optimisation: closing underperforming, often high-cost locations — typically in lower-footfall positions in markets where H&M has historically over-expanded — while simultaneously renovating flagship stores and selectively opening in new or growing markets. The group ended Q2 2026 with 4,038 stores, down from 4,166 a year earlier. In the first half of 2026 alone, 61 H&M brand stores were closed. The flagship brand has borne the heaviest closure burden, including the complete shuttering of all Monki physical locations globally — a deliberate move to make Monki a digital-first brand. For the full year 2026, H&M plans to close approximately 160 stores while opening around 80 new ones, a net reduction of roughly 80 stores that reflects the prioritisation of productivity over footprint. The Q1 2026 results specifically cited operating 163 fewer stores than a year earlier, or approximately 4 percent fewer, as a contributor to the top-line pressure — a short-term revenue headwind that management characterises as the deliberate price of long-term productivity improvement.

The second pillar is supply chain and inventory improvement. H&M has for years been criticised for over-ordering relative to actual consumer demand, resulting in heavy end-of-season discounting that damaged both margin and brand perception — the classic "pile it high, mark it down" problem that afflicts retailers who prioritise availability over accuracy. The group's inventory fell 10 percent in Q2 2026 to 34.94 billion kronor, and inventory productivity reached a 10-year high in Q1 2026 — meaningful evidence that the supply chain reforms are working at the operational level. Gross margin improvements of 120 to 160 basis points across recent quarters have been driven primarily by these internal supply chain improvements, with external factors including purchasing cost tailwinds also providing a positive contribution. The challenge, as Ervér himself acknowledged in the Q2 statement, is that tighter inventory management has "in some cases, affected our ability to fully meet demand" — meaning H&M has, in its zeal to avoid overstocking, occasionally ended up with the opposite problem of understocking, leaving customers unable to find their preferred sizes or styles in stores. This is the defining tension of the current phase: the discipline required to fix the inventory problem and the responsiveness required to capture sales are in direct operational competition with each other, and getting that balance right is proving harder than the theoretical framework suggests.

The third pillar is organisational simplification. H&M has been reducing the complexity of its management structure, streamlining decision-making, building stronger local presence, and consolidating back-office and technology functions. The 679 million kronor in restructuring charges booked in Q2 — the primary "one-off costs" referenced in the headline — are the direct financial cost of this organisational transformation: severance payments, office consolidations, technology transition costs, and the other expenses associated with fundamentally reorganising a 98,000-person global business. Ervér described these restructuring costs in his CEO statement as the result of decisions that "strengthen our local presence and create better conditions for meeting customer needs more quickly." The market's reaction to this cost — disappointment rather than credit for building a leaner structure — reflects the eternal tension between short-term earnings hits and long-term operational improvement.

The fourth pillar is brand elevation and portfolio strategy, which involves pushing the more premium labels (Arket, COS, & Other Stories) into new markets and new distribution channels while managing the core H&M brand's positioning more carefully than it has historically been managed. COS added five new stores in Q2 while the H&M brand was shedding locations. Arket opened its first store in Greece in Q1 and is entering Lithuania in 2026. Both Arket and & Other Stories launched on Zalando across multiple European markets in Q1, expanding reach without the capital commitment of new stores. H&M itself launched through Nordstrom in the United States, a notably different distribution strategy that places the brand in a premium department store environment rather than in standalone high-street or mall locations — a positioning experiment whose results will be closely watched. New market entry continues as well: H&M opened online in Ukraine in Q1 2026, entered Rio de Janeiro with a new store in Q2, and plans entries into Paraguay and Malta in the second half of the year, alongside Azerbaijan, a market that few of H&M's competitors have yet reached.

The Q2 Numbers in Detail

The second quarter covers H&M Group's March 1 to May 31, 2026 reporting period. Net sales fell 3.32 percent in local currencies. Gross margin in Q2 was 56.6 percent, an improvement of 1.2 percentage points over the prior year quarter, driven primarily by supply chain management improvements that have reduced purchasing costs and maintained discounting at levels comparable to the prior year — a meaningful achievement given the competitive environment. Operating profit and net income were broadly in line with Q2 2025 levels despite the top-line decline, demonstrating that the margin improvements are offsetting the volume shortfall at the operating level. The 679 million kronor restructuring charge, however, represented an additional drag on reported profit that was not present in the comparable prior-year period.

For the first half in aggregate: net sales fell 7 percent on a reported basis. Gross profit fell 4.11 percent, with a half-year gross margin of 53.8 percent — up 1.5 percentage points, continuing the multi-quarter improvement trend. First-half operating profit rose 4.33 percent to 7,425 million kronor ($760 million). Net income rose 2.77 percent to 4,667 million kronor ($478 million). These figures describe a company whose profitability is rising even as its revenues fall — a pattern that can be consistent with a healthy strategic transition (closing bad stores, tightening inventory, improving gross margins) but that raises legitimate questions about where the revenue recovery comes from once the structural fixes have run their course, if the product and brand investment required to drive volume growth has not kept pace.

Bloomberg specifically noted that Q2 revenue in local currencies fell 1 percent versus analyst expectations of flat growth, and characterised the results as "disappointing sales, posing a fresh challenge to the Swedish fast-fashion retailer's turnaround efforts amid intense competition and cautious consumer spending." City AM added that H&M "misses sales target as cost cuts leave retailer understocked" — the inventory balance problem in a single headline.

The Regional Picture: Where H&M Is Growing and Where It Is Not

The geographic performance breakdown reveals significant divergence. Western and eastern Europe, H&M's traditional heartland, saw sales declines in Q2. North and South America also fell — a market where H&M has historically struggled to achieve the brand resonance and store economics that it delivers in Europe. But southern Europe, often H&M's more volatile region, delivered a 5 percent revenue jump to 7.4 billion kronor ($577 million) in Q2 — a notably strong performance in a regional context where consumer confidence, while improving, remains sensitive to economic conditions.

The Latin America expansion is H&M's most actively discussed growth initiative for the second half of 2026: six more Brazil openings are already planned following the Rio de Janeiro debut, alongside Paraguay's first H&M store and the Malta franchise entry. Azerbaijan represents the furthest geographically adventurous new market on H&M's current expansion agenda. The US Nordstrom partnership is a qualitatively different kind of growth bet — not new geography but new channel, testing whether H&M's value proposition can be repositioned upmarket in a market where the brand has historically been perceived as a middle-of-the-road high-street option.

The Middle East: A Franchise Buffer From the Iran War

H&M's Q2 statement included a notable line on the Iran war and its ongoing aftermath: "The company has not yet been impacted by the situation in the Middle East." This is partly a structural feature of how H&M operates in the region — 137 of its Middle Eastern stores are operated through franchise partners as of May 31, 2026, meaning the financial exposure to any individual market's disruption is cushioned by the franchise model. The company said it was "closely monitoring developments" and that its "good flexibility in the supply chain and a low proportion of air freight" provided opportunities to adapt goods flows to changed conditions. Given that the strait's aviation disruption, global oil price spike, and supply chain volatility have been among the most consequential economic stories of 2026, H&M's stated insulation from direct impact so far is a materially positive disclosure — though "not yet" is doing meaningful hedging work in that sentence.

What Analysts Are Saying

RBS analyst Richard Chamberlain's assessment captures the market's nuanced but cautious view well. He acknowledged that H&M has "taken various steps to improve its offer for customers, which should lead to a stronger sales performance in time" while also observing that "a lot of things have to improve together and so far the recovery has been somewhat unbalanced." He said H&M has "potential to move to a double-digit operating margin goal over time, driven by gross margin gains and further cost efficiencies, but we see this as more of a medium to long-term development." That "medium to long-term" qualifier is the key phrase that explains Thursday's market reaction: a turnaround that is working but whose payoff horizon is measured in years, not quarters, is not what investors in search of near-term catalysts want to hear.

The Competitive Landscape: Why Turnarounds Take Time

H&M's challenges cannot be understood without acknowledging the specific competitive environment it is navigating. Shein, the Chinese ultra-fast-fashion platform, has achieved extraordinary scale at price points H&M cannot match and speed of product development H&M's traditional design and manufacturing cycle cannot replicate. Zara's parent company Inditex has been significantly stronger operationally in recent years, having made the same inventory and supply chain investments that H&M is now making — but having made them earlier, from a stronger starting position, and with a brand positioning that is more defensible at the premium end of the fast-fashion market. And the broader consumer environment for mid-price fashion — H&M's core territory — remains challenged by the ongoing cost-of-living pressures that this publication has documented extensively in the Nigerian context but that are equally visible across H&M's European and American core markets, where real wage growth, while improving, has not fully restored the discretionary spending confidence that existed before the inflation surge of 2022-2024.

In this environment, the discipline to close bad stores, tighten inventory, improve gross margins, and build a more focused organisational structure is the right medicine. The question is how long the patient needs to take it before visible strength returns to the top line — and whether the medicine itself, in the form of inventory tightness that leaves customers unable to find the items they want, is at some margin hurting the very consumer experience that needs to improve to drive the volume recovery.

What H&M Said About June and the Second Half

H&M's forward guidance for June 2026 was restrained but not alarming: sales in June are expected to be on par with the same month last year — flat year-on-year, which is better than the declines recorded in the two most recent quarters but not a growth number. For the second half of 2026, the continued store expansion in Latin America, the Nordstrom US distribution partnership, and the planned market entries into Paraguay, Malta, and Azerbaijan represent the primary growth catalysts on management's own agenda. The full-year 2026 SG&A growth ambition remains "low single digit in local currencies," with new technology infrastructure investment adding "somewhat increased cross-pressure throughout the year" — meaning further one-off or transition costs may appear in H2 even if restructuring charges decline from Q2 levels.

CEO Ervér's closing framing in his Q2 statement was forward-looking: "Our long-term work has strengthened profitability and gives us good opportunities to create even more value for our customers." The emphasis on "long-term" and "opportunities" rather than "delivery" and "results" is revealing. H&M's leadership knows that the turnaround is on the right track strategically. What they cannot yet show is that it has reached the point of self-sustaining momentum — where the operational improvements feed into customer experience improvements that feed into volume growth that in turn validates the strategy. Until that cycle becomes visible in the top line, the earnings calls will continue to feature a version of the same uncomfortable conversation: the margin story is good, the sales story is not yet good enough, and the one-off costs are real even if they are temporary.

Sources

1. Bloomberg — H&M Profit Misses Estimates as Turnaround Efforts Face New Challenges
2. WWD — H&M Q2 2026 Results: Sales Flat While Inventory Is Tightened
3. City AM — H&M Misses Sales Target as Cost Cuts Leave Retailer Understocked
4. Modaes Global — H&M's Financial Turnaround: Strong H1 Profitability Following Weak Q2
5. Sourcing Journal — H&M Group Q1 2026 Earnings: Q1 Sales Down 1% on Store Closures
6. Investing.com — Earnings Call Transcript: H&M Group Sees Profitability Gains in Q1 2026
7. Companies Market Cap — H&M Revenue
8. Google Finance — H&M (HM-B.ST) Stock Price and News