Shares in H&M were down by more than 6% this morning (27 March) as the Swedish fast fashion retailer booked a drop in first-quarter profit and revenue and identified four priority action areas – including supply chain – within which its transformation work will continue with “full force”.
In the three months to the end of February, the group’s profit after tax amounted to SEK1.37m (US$166,420), a 44.3% decline compared to SEK2.46m in the year-ago period. H&M said profit development in the quarter was negatively affected by weak sales as well as higher markdowns and noted a one-off positive tax income of SEK399m as a result of the US tax reform. Gross margin narrowed to 49.9% from 52.1% last year.
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Group sales, including VAT, declined 1.5% during the quarter to SEK53.55m from SEK54.37m in the year-ago period. Meanwhile, sales excluding VAT, totalled SEK46.18m, compared to SEK46.99m last year. In local currencies, sales including VAT were unchanged in the first quarter.
CEO Karl-Johan Persson noted the weak sales development combined with substantial markdowns had a “significant negative impact” on results in the first quarter.
“The rapid transformation of the fashion retail sector continues. As communicated previously, the start of the year has been tough.”
“The rapid transformation of the fashion retail sector continues. As communicated previously, the start of the year has been tough,” said Persson. “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.
“Weak sales in the fourth quarter, partly caused by imbalances in the assortment for the H&M brand, resulted in the need for substantial clearance sales in the first quarter. The high level of clearance sales combined with unusually cold winter weather had a negative impact on the sales of the spring garments.”
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By GlobalDataPersson added while many of the group’s ongoing initiatives are giving good indications and results, they have not yet been implemented at a large enough scale to have a decisive effect on the overall results.
He noted the retailer’s transformation work continues with full force and identified four priority action areas:
Restlessly develop brands, focusing on H&M
- Assortment – always have the best combination of fashion, quality, price and sustainability.
- Physical stores – develop new concepts and new formats at the same time as optimising its existing store portfolio.
- Online store – further enhanced through additional testing and faster development.
- Seamless – continued integration of the physical and digital stores so that customers can move frictionlessly between channels, for example through faster and more flexible delivery and payment options.
Accelerate key enablers
- Supply chain – ensure a faster, more flexible and more efficient supply chain.
- Expansion of initiatives relating to advanced analytics and AI.
- Continued investments in the retailer’s tech foundation with robust scalable platforms, faster development of various customer apps and new technologies.
New growth
- Continued digital expansion of existing brands into new markets and by working with external partners and social platforms. Widen the product assortment.
- New stores for existing brands, H&M focusing on emerging markets.
- New concepts and business models are in development.
Good cost control and efficiencies
- With good cost control, operating costs are expected to continue to increase at a slow rate.
- Ongoing efficiencies, with several promising initiatives within buying and production. In addition, the weaker US dollar is currently having a favourable impact on purchasing costs.
- Great potential for lower markdown costs in relation to sales from 2019 onwards.
Persson also revealed plans to launch H&M in Uruguay and Ukraine in the second half of the year, while the global roll-out of online continues with the launch of H&M online via franchise in Saudi Arabia and the United Arab Emirates in spring/summer 2018.
Afound will also be launched as a new brand during 2018, offering products from well-known external fashion and lifestyle brands as well as those from the H&M group.
Three new highly automated logistic centres with significantly increased capacity and efficiency and faster lead times will also be introduced during the year.
Looking ahead, Persson said the retailer’s assessment remains that sales for online and new business will grow by more than 25% during the year and that the H&M group will achieve “a somewhat better result” for full-year 2018 compared with the previous year.
“We take a long-term view that together with our knowledge and experience enable us to navigate through times such as this.”
“We take a long-term view that together with our knowledge and experience enable us to navigate through times such as this. We look forward to telling you more about the H&M group’s continued transformation work, which will lead us back to healthy growth in both sales and profitability,” he added.
Emily Stella, senior retail analyst at GlobalData, notes the online/offline sweet spot that all retailers are striving for is perhaps harder for a retailer such as H&M, whose aim is to deliver fashionable bargains to customers.
“H&M can optimise its online offer with faster and more flexible delivery, which it is striving to do, but will not be able to offer free delivery and returns without damaging its margins. Yet at the same time, the retailer, like many others, is struggling on the high street,” she adds.
