H&M hails stronger full-price sales despite profits drop

By

Sandra Halliday

Published
Jan 31, 2019

H&M’s results announcement on Thursday included plenty of positives for the full year and final quarter to November 30, but the surprise was that Q4 pre-tax profit fell. The quarter was still being affected by the costs of upgrading its logistics systems that had also impacted it earlier in the year.

Analysts had expected a pre-tax Q4 profit of over SEK5bn (€482m/£422m) but the actual figure was SEK4.35bn, down from SEK4.87bn a year earlier.

Yet the overall impression was that the company is getting on top of its problems and the fact net sales since the period ended, from December 1 to January 28, have increased by 4% in local currencies.

And "stronger collections and increased full-price sales” mean that for 2019’s Q1, the company expects markdowns to be around 1 percentage point lower and it should see “a continued improvement in the inventory situation compared with the previous quarter.”

FULL-YEAR NUMBERS

Looking back at the full year, net sales, increased 5% to SEK 210.4bn, or a rise of 3% in local currencies. And while its “ongoing transition work” dented profits, it also “contributed to gradually improved sales development and increased market share in most markets during the second half.”

The company also said that group online sales “continued to develop very well during the year.” In fact, they rose as much as 22% to SEK30bn (or 21% in local currencies), and now account for 14.5% of the group’s total sales, up from 12.5% a year earlier. 

Gross profit for the year rose to SEK110.88bn from SEK108.09bn, but the margin dipped to 52.7% from 54%. Profit “after financial items” (that is, pre-tax profit) fell to SEK15.63bn from SEK20.8bn. That meant net profit fell to SEK12.65bn from SEK16.18bn. 

And in Q4, the group’s net sales increased by 12% to SEK56.4bn, and although they only rose by 6% in local currencies, that was still a healthy figure. And more good news was that the increase was driven by increased full-price sales and lower markdowns.

Also encouraging was that e-sales continued to rise strongly in Q4. They were up 24% in total, which is ahead of 22% full-year figure, although they ever-so-slightly lagged the full-year figure in local currencies being up only 20%. And with all countries now on its new e-tail platform and three new fulfilment centres opened during the quarter, the company is ready to process even more e-sales.

Gross profit for the quarter was up to SEK30.59bn from SEK27.92bn, although the gross margin fell to 54.2% from 55.4%. The cost of markdowns in relation to sales decreased by 0.6 percentage points. But, as mentioned at the start, pre-tax profit fell and so did net profit, dropping to SEK3.54bn from SEK3.99bn.

But back with the good news, the company outperformed in some markets during Q4. In the UK, for example, 38% online growth, offset against a 1% decline in stores, led to total growth of 8%. In several markets the total growth was driven by both physical stores and online. Among these were China (+24%), India (+43%) and Russia (+27%). However, other markets such as the USA and Norway, were “more challenging”. 

UPBEAT OUTLOOK
The company has clearly faced challenges in the past year but seems to no longer be on the back foot and took an upbeat stance in its comments on the quarter/year just gone and the year ahead.

It highlighted how online and physical stores are being increasingly integrated, while the rollout of its online store continues. H&M online is now in 47 markets and during 2019 Mexico will be added, as well as Egypt. The company also plans a net addition of 175 new physical stores this year, of which almost half will consist of newer brands.

CEO Karl-Johan Persson referenced the “challenging year for H&M group and the industry,” but said that “after a difficult first half, there are signs the company’s transformation efforts are beginning to take effect. Improved collections generated better full-price sales and lower markdowns towards the end of the year. We’re making progress across all our strategic focus areas.”