A first quarter to forget: Hennes & Mauritz AB's shares down to 13-year low

Hennes & Mauritz AB H&M has just closed a first quarter to forget about, marking the Swedish apparel retailer’s lowest first-quarter’s profits – down 62 percent to 150 million dollars - in over 13 years. An excessive increase of stock, aggressive markdowns, and tight competition have dragged H&M’s parent group well below their revised forecast for the first three months of their fiscal year.

The Swedish group reported an operating profit slip of 62 percent to the lowest level in more than a decade as clearance sales failed to reduce accumulated stock. As a result, the world's second-largest clothes retailer said it would be forced into more discounting after seeing a bigger-than-expected 7 percent increase in inventories.

Chief Executive Officer Karl-Johan Persson said Tuesday the company made mistakes by narrowing its assortment last year, though he expects sales to improve in the second half. On the wake of the news, H&M shares were down 6.4 percent to 13-year lows.

On the upside, the apparel group highlighted that online sales rose by approximately 20 percent year on year. H&M said it’s maintaining its targets for sales growth of at least 25 percent from e-commerce and new businesses this year, even though it missed that rate in the first quarter. Revenue from new businesses improved by 15 percent.

Mounting inventory, H&M’s beast to defeat

“The worrying sign again comes from unabated piling-up of inventory," said Chris Chaviaras, an analyst at Bloomberg Intelligence. H&M said most of that is spring garments, though a small portion is older than 12 months. According to market sources, H&M currently sits on their largest pile of unsold goods in over 20 years.

Unseasonal weather patterns are taking a toll on all retailers worldwide, which are not coping – or at least not quickly enough – with warmer winter months that not invite consumers to buy woolly garments and coats.

The retailer unveiled earlier this week its intention to reduce inventory to 12 percent to 14 percent of sales in 2019. Stock-in-trade rose to almost 18 percent of sales in the first quarter. In fact, the Swedish fashion retailer said it’s increasing markdowns this quarter after accumulating a record pile of unsold garments worth more than 4 billion dollars.

However, these price reductions won’t last forever, as the world’s second largest apparel retailer’s CEO said they plan to reduce markdowns in the second half, when sales should improve and a weaker dollar will help reduce garment costs.

2018, “a transitional year for H&M group”

"2018 is a transitional year for the H&M group, as we accelerate our transformation so that we can take advantage of the opportunities generated by rapid digitalisation," Chief Executive Karl-Johan Persson said.

The company’s shares have resented from the profit dive, touching 13-year lows. “We haven’t improved fast enough,” said Persson family. “We’re working hard to fix that.”

Part of these recovery efforts is Afound, a new brand dedicated to sell clothes from various brands including H&M at discounted prices. Additionally, the retail group will add three automated logistics centres this year to speed up deliveries.

Last month, H&M forecast sales in comparable stores to drop this year before returning to growth in fiscal 2019. Persson reiterated H&M’s forecast for some improvement in operating profit this year. Analysts expect a 7 percent drop.

Alvira Rao, an analyst at Barclays warned that “The next 12-18 months will be challenging,” for H&M, adding that the initiatives undertaken by the group may not be enough to keep up with increasing competition.

Looking ahead, H&M doesn’t plan launching any more new brands this year, though could consider doing so in 2019. Also, the group might have e-commerce in place in all its markets by 2020, Persson said. This month, the retailer began online sales in India and launched H&M on Alibaba Group Holdings Ltd.’s Tmall service in China.

Image: H&M