H&M (HMb.ST) shares hit a 16-month high on Thursday after its second-quarter profit beat estimates with its summer collection doing well as warmer weather arrives in Europe.

H&M, which has lagged Zara owner Inditex (ITX.MC), has sought to raise its fashion appeal and boost its higher-priced brands, targeting shoppers less vulnerable to the rising cost of living as fast-fashion giant Shein takes market share with less expensive clothes.

Shares in the world’s second-biggest fashion retailer jumped 10.8 per cent to hit their highest level since February 2022. They were last trading at 174.6 Swedish crowns.

H&M increased sales in many markets despite a squeeze on consumers’ spending ability and “unfavourable” weather,” CEO Helena Helmersson said, adding that its summer collection had got off to a good start as temperatures rose across northern Europe.

Sales from June 1-27 were up 10 per cent from a year earlier, H&M said, a good sign for the start of its third quarter.

A sharp drop in inventory levels was another positive surprise, said Cedric Rossi, next-gen consumer analyst at Bryan Garnier in Paris.

“I was really surprised to see that, without any higher promotional activity – because markdowns were in line with last year – H&M decreased its inventory position,” Rossi said.

H&M’s inventory was at 16.7 per cent of rolling 12-month sales on May 31, down from 19.2 per cent a year earlier.

The stronger-than-expected profit and inventory position helped investors digest a weaker margin of 8.2 per cent for the second quarter, down from 9.2 per cent a year earlier.

H&M blamed high raw material and freight costs for the lower margin, but said these factors had “pivoted from being negative to being positive”, indicating easing inflationary pressure.

H&M last year announced layoffs and other cost cuts that it said would help it reduce costs from the second half of 2023 onwards.

“The external factors that affect our purchasing costs continue to improve, work on the cost and efficiency programme is proceeding at full speed, and much of the work that we have done in recent years is starting to bear fruit,” Helmersson said.

Operating profit in the Swedish group’s March-May second quarter was 4.74 billion Swedish crowns ($438.6 million) down from 4.98 billion a year earlier but above the 4.07 billion forecast by analysts in a Refinitiv poll.

H&M, which closed a total of 303 stores across its brands in the year to May 31, said its new store openings would mainly be in “growth markets” while it would close stores mainly in established markets.

($1 = 10.8084 Swedish crowns)