H&M has challenging first half, predicts stronger period ahead

By

Sandra Halliday

Published
Jun 28, 2018

The news hasn't exactly been brilliant for H&M on the sales front in recent periods, so it was interesting on Thursday to see the fashion retail giant’s six-month results, hear some explanation and discover how upbeat it is for the future.

But first, the figures. In the six months to May 31, group sales including VAT were SEK114.017 billion, up from SEK113.907 billion a year earlier. But in local currencies they were “unchanged” and excluding VAT, sales dipped slightly to SEK98.165 billion from SEK98.368 billion.

That meant profit after financial items fell sharply to SEK7.275 billion from SEK10.92 billion and net profit dropped down to SEK6.01 billion from SEK8.354 billion.

The company had already reported its Q2 sales figures, but just to recap, including VAT they rose 2% and in local currencies they were flat. And on Thursday it said that the Q2 gross margin dropped to 56.1% from 57.1% while net profit fell to SEK 4.638 billion from SEK5.897 billion.

Clearly, sales aren't exactly buoyant, but profits are falling faster than turnover. So what's the reason? The retailer explained that it’s “going through a period of transformation to make the company even more customer-driven, efficient and flexible.” This includes “necessary transitions to new logistics systems that will allow even better availability, speed and transparency.” 

However, sales and profits were temporarily affected by “interruptions in connection with such transitions carried out in [Q2] in major markets such as the USA, France, Italy and Belgium,” as well as affecting its webstore ops in the Nordics region.

Despite all the challenges, in a number of markets sales developed positively during the first half and H&M grew “considerably faster than the market”  in Sweden, Norway, Denmark and Eastern Europe. The business interpreted this as a sign that it's on the right track and that its digital improvements are beginning to feed through.

Overall though, the CEO admitted that Q2 sales “were not satisfactory” and “work on our priority action areas continues at full speed.”

PROFITS POTENTIAL

Such work and the major investment that comes with it, of course, holds out the hope of greater profits in future and H&M added that when it comes to artificial intelligence and advanced data analytics, it's seeing “very good results from ongoing pilot projects, which are now being scaled up.”

And it has other potential growth areas to focus on as well. The group’s ninth brand, the off-price specialist Afound, was launched in Sweden in June and “has been very successfully received both in-store and online,” H&M said.

Further actions to boost growth during the second half will include H&M Home broadening its product range to include lamps and furniture, and in 2019 the company will open stores in Bosnia-Herzegovina and will extend its webstore to Mexico.

CEO Karl-Johan Persson referred to the rapid transformation happening in the fashion retail sector at the moment and said the current transitional period “is both exciting and challenging.” Challenging because it’s “complex, extensive and the pace of change is fast.” Exciting because “we can see positive trends and big potential in connection with our improvement work and investments.”

FOCUS AREAS

The company had signalled early on that it was going to be a tough first half and Persson admitted that the firm’s core chain went into the second quarter carrying too much stock and “still had some imbalances in the H&M assortment – something that we are gradually correcting.” As part of its transformation work, it’s “transitioning logistics systems to make our supply chain even faster, more flexible and more efficient,” he explained.

So what exactly are the firm’s priority action areas? Its highest priority is the H&M brand, where “we are continuing our improvement work on the assortment and the customer experience in-store and online – while at the same time continuing to integrate the two channels.”

Getting the product and the mix right is importance and Persson said that the company is “already seeing positive results from our summer collections, which have sold better than the corresponding collections last year.”

As mentioned, technology is a major focus as well and is generating positive early results and H&M is also continuing to develop its store portfolio. This year it plans to open around 390 stores and to close 150, resulting in a net addition of 240 new stores for the year. “We still see great potential for new stores in the coming years as our newer brands gradually come to make up an ever greater share of the store portfolio,” the company said.

And the web is another major focus. In parallel with the development of its own online store, sales of H&M on Tmall have “got off to a very good start with tens of millions of visitors in the first couple of months, contributing to increasing sales in China.”

Persson said the retailer can see that “things are moving in the right direction, even though many challenges remain and there is a lot of hard work still to do.”

The first half of the year was “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. We have a long-term approach and are optimistic about the future for the whole of the H&M group, with good growth in both sales and profitability for many years to come.”