H&M has battled with slowing sales and falling profits in the last few years as a result of declining footfall due to changes in customer behaviour, particularly in its namesake stores

H&M has battled with slowing sales and falling profits in the last few years as a result of declining footfall due to changes in customer behaviour, particularly in its namesake stores

H&M CEO Karl-Johan Persson is confident the Swedish fashion retailer's transformation strategy is bearing fruit as its improvement work helped boost sales in the first nine months of the year, despite a drop in earnings and the "many challenges" that still remain.

In its nine-month report today (27 September), the retailer said profit after tax amounted to SEK9.1bn (US$1.01bn) during the period from 1 December 2017 to 31 August 2018. This compares to earnings of SEK12.19bn in the year-ago period.

Group sales grew 1% in local currencies, including VAT, during the nine months, compared to the corresponding period last year.

Converted into SEK and including VAT, sales increased by 3% on last year to SEK178.82bn during the first nine months of the financial year. Sales excluding VAT were SEK153.99bn, an increase of 3%.

As previously reported, H&M posted a rise in sales during the third quarter, regaining its upward trajectory after two straight quarters of flat sales growth.

In a trading update earlier this month, the retailer said group sales grew 4% in local currencies during the period from 1 June to 31 August, compared to the corresponding quarter last year.

Converted into SEK and including VAT, sales increased by 9% on last year to SEK64.8m. Meanwhile, sales excluding VAT, amounted to SEK55.8m, compared to SEK51.2m last year. The group's online sales increased by 32%.

H&M said the ongoing transition has contributed to gradually improved sales and increased market share in most markets.

However, it added problems that arose during the implementation of new logistics systems in the US, France, Italy and Belgium during the spring led to extraordinary costs of around SEK400m in the third quarter. Sales in these markets decreased by 8% overall, while overall sales for the other 66 markets increased by 8% in local currencies during the quarter.

According to CEO Persson, the new logistics systems are an "essential part" of the retailer's work to make its supply chain faster, more flexible and more efficient, and to continue the integration of stores and online.

Meanwhile, the group's profit after tax amounted to SEK3.1m in the third quarter, compared to that of SEK3.8m in the year-ago period.

"The rapid changes in the fashion industry are continuing and the H&M group is in an exciting transitional period," said Persson. "Our transformation work has contributed to a gradual improvement in sales development with increased market share in most markets during the third quarter, particularly in Germany, Sweden, Eastern Europe, Russia and China."

Persson added the most important aspect of the group's improvement work is to develop its assortment in line with customers' increased expectations and to offer the best combination of fashion, quality and price in a sustainable way.

"On top of that, we are also working to enhance the customer experience. We are getting a positive response from customers to the changes that we are making both online and in stores – including in those H&M stores, where we are trying out various adjustments to our assortment, product display and shop fittings. We are therefore now scaling up this to more stores and markets. Our improvement work is benefiting from our investments in advanced data analytics and AI in areas such as quantification, allocation, pricing and trend forecasting."

In addition, the group continues to optimise its store portfolio in order to accommodate customers' changed shopping patterns in what Persson called the "ongoing shift online".

"In the year to date this has meant a lower net addition of new stores within the group," he said. "We are also seeing that the shift provides opportunities to achieve even better lease terms for both new and existing stores.

"As always, we have a long-term perspective. Our improvement work is continuing and although many challenges remain, there are more and more indications that we are on the right track. We are therefore positive towards the future and the opportunities that exist for the H&M group." 

H&M's transformation strategy makes progress

Kate Ormrod, lead retail analyst at GlobalData, notes H&M's transformation strategy is making progress.

''Significant strategic change will never come without its challenges and FY2017/18 has proved to be problematic for H&M," she says, adding the value retailer is still somewhat plagued by issues stemming from the introduction of a new logistics system in the spring, particularly in the US, France, Italy and Belgium, however it is starting to see results.

"Though a necessary move to drive efficiency and support the growing shift to online, logistical issues are yet to be fully resolved, despite costing the group SEK400m in Q3 alone, and will likely mute any further transformational benefits in Q4," she adds.

Meanwhile, investment in online is long overdue at H&M, according to Ormrod, especially given consumers' channel-hopping tendencies and high expectations.

"With online penetration rising, driving profitability is imperative," she says. "The clothing specialist's loyalty scheme, H&M Club, which is free to join, provides unlimited free UK standard delivery without a spend threshold – a big asset in the value segment, but costly. The lack of a next-day delivery saver scheme is notable, and would help to lock in loyalty and drive revenue. Letting H&M down is its social media engagement, with the retailer needing to better leverage such channels to keep up with fast fashion rivals, especially online pureplays, and garner hyper-engaged higher-spending customers."

Looking ahead, Ormrod expects H&M's Q4 designer collaboration with Jeremy Scott's Moschino to be significantly less commercial than last year's Erdem collection, given the Moschino brand aesthetic.

"Limited-time collaborations enable H&M to appeal to a new customer base and showcase its fashion and design credentials, but retaining focus on core ranges and loyal shoppers is essential to drive recovery," she warns.

Retailers must use technology to get ahead

Meanwhile, Neil Chapman, partner at Infosys Consulting, says H&M's profit dive provides a classic example of a retailer inaccurately forecasting consumer spending – resulting in a warehouse full of stock, profits shrinking and inventories piling up. 

"While H&M's new logistics system and store concepts succeeded in increasing sales figures, profits have taken a nosedive. It seems that the budget fashion house did not predict just how vital the supply chain is when it comes to maximising sales.

"H&M's problem highlights the need for accurate forecasting and getting the product mix right. It's great for retailers to work with marketing to boost new products, but if this isn't communicated and shared with sales and supply, then the journey stops there and the warehouse is left with a surplus of incorrect stock."

This, Chapman says, is where a fully digital supply chain will benefit retailers, commanding stronger communication skills and helping teams to liaise as effectively as possible with suppliers and within the business.

"Employing predictive analytics gives retailers the tools to understand and predict customer demand to streamline their procurement, and provide better customer experience at the same time," he says. "While this will demand a higher level of data analysis, so that employees can take advantage of the data being collected by AI and predictive analytics, it's worth the investment.

"The best way for retailers to meet consumers' growing list of expectations – while delivering more sales and boosting profits – is to use technology to get ahead."