Hennes & Mauritz AB (H&M) said price cuts to clear inventory over the next three months may exceed last year’s, sending the shares tumbling to a four-year low.
Chief Financial Officer Jyrki Tervonen’s comment on a conference call prompted a stock-price reversal after the retailer earlier reported first-quarter earnings that beat estimates and announced the addition of its first new store brand in three years.
H&M’s inventory levels are up 30% year over year and profit will be hurt should the retailer have to offer deeper discounts, said Michelle Wilson, an analyst at Berenberg. Sales in the year to date haven’t lived up to H&M’s expectations, CEO Karl-Johan Persson said in an interview, adding that a goal for annual sales growth of 10 to 15% has become more challenging.
“The company’s results have been falling short of expectations recently, consistently outpaced by key rival Inditex,” Bernadette Kissane, apparel and footwear analyst at researcher Euromonitor International, said by email.
The Swedish company is struggling to keep pace with Zara owner Inditex, which has put a greater emphasis on e-commerce and has proved more adept at responding to shifts in consumer tastes.
“It’s a challenging market and we need to look at everything,” Persson said. “We see that we can improve in a number of areas, including in speed and flexibility.”
One area H&M, No. 77 in the 2016 Internet Retailer Europe 500, is placing greater emphasis on internally is doing a better job of connecting its retail locations with its online store as well as making supply chain improvements to become more efficient.
“To meet the rapid change that is going on in fashion retail we need to be even faster and more flexible in our work processes, for example as regards buying and allocation of our assortment,” Persson said. “We are therefore investing significantly in our supply chain, such as in new logistics solutions with greater levels of automation, but also in optimizing our lead times. In the changes we are making, advanced analytics will provide important support for decision making.”
H&M is also planning on continuing its international online expansion by opening online stores in six new countries during the first half of this year.
Tervonen said markdowns will be “more aggressive” if sales don’t improve in April and May.
New brand
The retailer said it will open its first Arket outlet in London in the fall, selling clothing and a limited range of home furnishings at prices slightly above the company’s main brand. Stores in Brussels, Copenhagen and Munich will follow, and the brand will also sell online, initially in 18 European markets.
Arket is the company’s first new label since the launch of & Other Stories in 2014 and will include products for men. The range will be supported by a selection of external brands including sneakers from Venga, and shoes from Tricker’s and RM Williams, H&M said. Where possible, the stores will also include a cafe.
Arket’s price range will be most similar to that of the retailer’s COS brand, which sells cotton parka jackets for 125 pounds and suede Oxford shoes for the same price.
Profit decline
“The concept of Arket is quite unlike anything we’ve seen from the company before,” Kissane said. The brand “may well provide H&M with the leverage to gain back some lost market share.”
H&M said first-quarter pretax profit fell 3.6% to 3.21 billion kronor ($362 million), compared with an average estimate of 3.03 billion kronor. The beat was driven by better product buying and fewer markdowns, said Richard Chamberlain, an analyst at RBC Europe.
The fast-fashion retailer gets about 80% of its products from Asia, where the dollar’s strength has inflated the cost of purchases of garments, as many currencies in the region are linked to the currency. H&M also said it’s battling with weaker sales in central and southern Europe and in the U.S.
Internet Retailer’s Matt Lindner contributed.