H&M Struggles With Russian Closures, Surging Costs and New Covid-19 Disruptions

H&M said closing its 185 stores—and halting online sales—in Russia, Ukraine and Belarus, resulted in sales growth slowing to 6% in March from 18% in the first quarter ended Feb. 28. Stripping out the impact of those three countries, sales growth in March was 11%, which analysts said was disappointing.

Shares were down 11% in afternoon trading in Stockholm, hitting the lowest level in nearly two years.

The downbeat update lays bare the challenges facing H&M when it had set its sights on expansion. After the company ended 2021 with sales back to pre-Covid levels, Chief Executive Helena Helmersson set a target at the start of this year to double sales by 2030, while halving its carbon footprint.

Until the past few weeks, Russia had been a high growth and very profitable market for H&M, Ms. Helmersson said. Now the company’s future in Russia—H&M’s sixth largest market—is unclear, she said.

“It’s too uncertain to say what will happen and what kind of decisions we will take,” Ms. Helmersson said. “The obvious question for all companies now is about the future.” Meanwhile, H&M is negotiating with landlords in Russia on rents, working on employee welfare and ensuring it complies with sanctions, she added.

Having focused on containing costs and managing cash flow throughout the pandemic, the company had more recently shifted its focus to growing sales. Faced with increased competition from Chinese apparel maker Shein and other online-only brands, H&M has been working to improve the customer experience.

H&M has been rolling out more click-and-collect services, allowing returns of items bought online in stores and working on technology that enables customers to find out where clothes seen online can be found in physical stores.

The company is also trialing a marketplace in Sweden and Germany that lists other brands such as

SuperDry

alongside its own, to broaden what it offers to customers, as well as offering secondhand clothes from its brands on its platform Sellpy.

However, those efforts are adding to costs at a time of already surging inflation. Jefferies analyst

James Grzinic

on Thursday cut his full-year earnings forecast for H&M by 30% following the results, saying he now expects more modest sales growth and greater pressure from input costs.

Mr. Grzinic said sales in March were below expectations, despite resilient demand in the U.S. and Europe as both regions recover from the pandemic. Investors looking forward will likely focus on whether the company’s climbing operating expenses could be offset by higher demand, he added.

Ms. Helmersson said H&M is grappling with Covid-related supply-chain disruptions as well as higher shipping and raw material costs. She said she expects higher input and freight expenses in the second quarter, versus a year earlier, and for costs to continue to rise this year.

H&M said it would follow peers and raise prices starting in the second half of the spring.

The first quarter of 2022, Ms. Helmersson said, “was marked by the Omicron virus and its negative effects.”

As a new wave of the virus has swept China, H&M has closed 42 of its 430 stores there. Ms. Helmersson said H&M was also still struggling with the fallout from a Chinese boycott last year, after raising concerns about forced-labor allegations in China’s Xinjiang region. “We are still in a complicated situation,” she said. One year on, sales in China still aren’t what “we would have wished for,” she said.

H&M was in dialogue with several stakeholders in China to try to improve the situation, Ms. Helmersson said, but is also focused on launching more products, designs and colors that specifically appeal to Chinese consumers, including for events such as local holidays.

Overall, the company said its spring collections have been well received in markets where they have been launched. Compared with this time last year, when shoppers grappling with Covid-19 were focused on basic items, demand for new and more fashion-forward designs is now higher.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com