H&M plans further price cuts as it struggles to get a handle on unsold stock
By Anna Ringstrom - Jun 29th 2018, 15:08
H&M plans to cut prices further as supply problems hamper the Swedish company’s ability to respond to fast-changing fashion demand, swelling its stockpiles of unsold clothing.
The world’s second-biggest fashion retailer after Inditex reported a further drop in profit for the quarter to the end of May and said it would now be tougher to reach its target of a "somewhat better" result for 2018.
"The first half of the year has been somewhat more challenging than we initially thought, but we believe that there is a gradual improvement and that we will see a stronger second half," CEO Karl-Johan Persson said.
However, he told analysts that supply disruptions would continue to hurt its sales in the third quarter as it upgraded its logistics software in a move to speed up deliveries.
H&M shares, which have lost nearly two-thirds of their value since record highs in 2015, initially fell 4% but turned positive to trade 1% higher by 12.58pm GMT.
The shares are by far the most-borrowed on the country’s blue-chip stock exchange with 16.8-billion krona ($1.87bn) of stock currently out on loan, according to data from FIS Astec Analytics, creating a periodic need for investors to cover short positions.
H&M stock has also gyrated in recent months amid large stock purchases by the founding Persson family — which has not been able to buy shares in the past month because of insider-trading regulations — and rumours of buyout plans.
Pretax profit in H&M’s fiscal second quarter shrank 22% from a year ago to 6.01-billion krona, slightly below the average forecast in a Reuters poll of analysts.
It said earlier in June that sales in the March-May quarter were unchanged, after falling in the previous two.
Hit and miss
The group’s inventories and markdowns have been increasing in the past couple of years. As expected by analysts, they grew again in the second quarter to the end of May — inventories 13% and markdowns 1%. "The main issue remains the unstoppable increase in inventories … which implies a lingering threat on the gross margin over the next quarters," wrote Bryan Garnier analyst Cedric Rossi, confirming his "neutral" rating on H&M.
Persson said in a conference call with analysts that the logistics issues were not the only reasons for the slow second-quarter sales, but did not elaborate.
After decades of rapid expansion growing to more than 4,700 stores, H&M has seen sales growth stall as it struggles to adapt to a customer shift online and to fend off increased competition from other budget labels, resulting in fewer visitors to its main H&M brand stores.
It has also been less successful in responding to fast-changing fashions than Zara owner Inditex, which sources its clothes close to its northern Spanish headquarters and has a more flexible supply chain.
H&M, which makes the bulk of its sales in Europe, said work to speed up its logistics systems had resulted in temporary interruptions, hitting sales in major markets such as Germany and the US.
By comparison, Inditex has reported healthy local-currency sales growth for its February-April quarter as well as for the following six weeks.Business Live
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