World's Second Largest Clothing Retailer Crashes Most In 16 Years

Shares of Stockholm-based Hennes & Mauritz, better known as H&M, the world’s second largest clothing retailer after Inditex (owner of Zara), crashed 14.8% after reporting an unexpected drop in fiscal 4Q 2017 sales. Sales missed both consensus and company estimates with the resulting fall in H&M’s share price was the steepest intra-day decline since 11 September, 2011. 

Source: FT.

The news from H&M, along with a warning from Italian luxury goods maker, Ferragamo that it could no longer confirm profits targets for the next three years, helped drag down the European retail sector as a whole. The Stoxx Retail sector index declined more than 2%, taking its year-to-date decline to 3.5%, the worst sector performance in 2017. H&M is down more than 30% this year, while Dixons Carphone is down 47%, Carrefour down 24% and Inditex down 6.3%, Bloomberg reports. The broader Stoxx 600 as a whole is up 7.5% year-to-date.

H&M reported Q4 2017 sales excluding VAT of SEK50.4 billion, a drop of 4% compared with the year ago quarter. Analysts had been expecting a 2% rise in sales to SEK53.9 billion. In the press release, H&M blamed lower “footfall” in its physical stores bearing the H&M brand.

...sales development in the fourth quarter was significantly below the company’s own expectations. The H&M brand’s online sales and sales of the group’s other brands continued to develop well. Meanwhile, the quarter was weak for the H&M brand’s physical stores, which were negatively affected by a continued challenging market situation with reduced footfall to stores due to the ongoing shift in the industry. In addition, there have been imbalances in parts of the H&M brand’s assortment composition. In order to correct this, a number of actions have been taken. Moreover, the management team of the H&M brand has recently been strengthened. 

As Bloomberg notes, H&M is not managing the continuing shift towards online as well as some of its competitors.

H&M reported the biggest drop in quarterly sales in at least a decade Friday as fewer customers visited H&M stores, raising questions about the company’s expansion plans. The retailer said it plans more store closures and fewer openings as a crisis that’s shuttered shopping malls in the U.S. spreads to other parts of the world. The company’s earnings have suffered this year amid markdowns to clear out inventory.

 

Rival Inditex has been outpacing H&M as it expands more aggressively in e-commerce. The Spanish company this week reported a rebound in revenue growth for November and early December.

The decline in H&M’s Q4 2017 sales was only the third decline in the past decade. The company is playing catch-up on e-commerce and fast fashion. According to H&M.

In order to respond even quicker to customers’ fast-changing behaviour the company’s ongoing transformation journey is being accelerated. Among other things, this includes continued integration of the physical and digital stores, and intensifying the optimisation of the H&M brand’s store portfolio – leading to more store closures and fewer openings.

H&M said in September it planned a net addition of 385 stores this year, which includes 90 closures. The company also said at the time it aimed to have online sales in 43 markets by year-end. Inditex already sells online in 45 markets and is starting to add services such as same-day delivery in key cities. In an effort to boost e-commerce, H&M said it’s expanding a cooperation agreement with Alibaba Group Holding Ltd.’s Tmall to add additional brands on the Chinese digital platform.

Some are very skeptical the company can pull it off: German broker Berenberg, which had a sell recommendation on H&M shares, cautioned that a turnaround in the company would take time and recommended selling through to next February’s capital markets day. Via Bloomberg:

Broker sees the capital markets day in Feb. 2018 focusing on investment in accelerating the supply chain and integrating stores and online; Says while important areas of investment, it will take time – a distribution center typically takes three years to build and automate; sees top-line growth minimal and profitability flat at best in meantime Says to keep selling into the Feb. CMD. Expects consensus to cut estimates by 3% in FY17, more significant cuts in outer years.

“H&M’s supply chain lacks reactivity, which is one of the group’s structural issues in front of abrupt changes in fashion,” wrote Cedric Rossi, an analyst at Bryan Garnier.

Macquarie Capital analyst Andreas Inderst said he sees a “clear divergence between winners and losers” and remains “on the sidelines” for H&M, which he rates neutral. He’s positive on Inditex and online retailers Zalando SE and Asos Plc.

Less than two weeks ago, Goldman cut the recommendation on H&M to sell highlighting its concern that company initiatives, like data analytics, RFID, Click & Collect and increased in-season sourcing would be offset by structural headwinds, like online cannibalization of store sales and its long lead-time retail model. It forecast zero like-for-like sales growth during 2018-19. In November, Handelsbanken downgraded the shares to Reduce from Accumulate, seeing a “painful journey” towards digitalisation for the company.

As such, H&M is fast becoming a belated poster child for the significance of a carefully executed e-commerce strategy in the retail sector.

Comments

Endgame Napoleon Stuck on Zero Fri, 12/15/2017 - 15:12 Permalink

If you are not being paid to have sex and reproduce as a single mom or an immigrant, getting free rent, free food and checks at tax time that top out at $6,444 called child tax credits, you have zero money for clothing or anything extra after rent is paid. It takes half or more of earned-only income for those who have not reproduced. Young, single, childless people are often among this group, as are older, single, childless people, but young people tend to spend more money on clothing, trying to impress the opposite sex. The young have no vanity money anymore, when yearly pay in many states is around $18,189, like in the state of Alabama, for instance.

https://en.m.wikipedia.org/wiki/List_of_Alabama_locations_by_per_capita…

https://en.m.wikipedia.org/wiki/List_of_South_Carolina_locations_by_per…

https://en.m.wikipedia.org/wiki/List_of_Mississippi_locations_by_per_ca…

https://en.m.wikipedia.org/wiki/List_of_Tennessee_locations_by_per_capi…

https://en.m.wikipedia.org/wiki/List_of_Kentucky_locations_by_per_capit…

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-cr…

In reply to by Stuck on Zero

Sandmann Fri, 12/15/2017 - 07:39 Permalink

These stores are a disaster. They screw down Chinese/Ukrainian/Thai/Bangladeshi suppliers by demanding cost reductions every year and they react by falsifying sizing and reducing seam overlap. Containerloads of this crap arrive in ports and hang out on rails for women to buy on credit find it does not fit/shrinks/loses dye and then finds a recycling bin.They have the technology to make made-to-measure and flash the specs via satellite to a factory in Sri Lanka or Bangladesh and ship a tailored unit to the store for pickup.Why they go mad on oil-based polyster rather than cotton or why they don't spin fine wool is not clear. Why are they using oil-based and plant-based materials when the price of wool is so low and so much better for wicking ?

Lt. Frank Drebin Fri, 12/15/2017 - 07:41 Permalink

I travel about 80-90% a year, globally. I can tell you this thing is systemmic, not just H&M. Everyone walks around malls and shopping centers, but maybe 5% are holding a bag (ie. they purchased something). This is true even this time of year. Put your ceramic vests on and check your local mall.For observation, it looks like its just a place to walk around and socialize now, try on a few things to buy online later. If that is the case, its only a matter of time before the satellite malls close and only one or two are left per city, which really, is a good thing in the long run. 

BabaLooey Philo Beddoe Fri, 12/15/2017 - 07:58 Permalink

Good on ya Philo....SmartManufactured "joy".....pass here too.I eschew the Holiday gift giving vomitus and practice (in real life) kindness year round.I once asked my own Father why he (and my Mom) ignored Valetine's Day (just another day in our household)."What's wrong with February 18th?" - was his thought-provoking retort. 

In reply to by Philo Beddoe

Cloud9.5 XBroker1 Fri, 12/15/2017 - 08:37 Permalink

A wife is the person who makes a list for things for you to do.  The list compounds after you retire.  Then it includes the mother, mother in law, daughter in law and  the wife.  If you think I’m kidding, I just got a text from the daughter in law.  I get to go over to her office and cut a fallen limb off her building.  Hurricanes, the gift that keeps on giving.

In reply to by XBroker1

cookies anyone Fri, 12/15/2017 - 08:07 Permalink

H&M and all the other gigantic "too big to fail" idiotic globalist constructions should and will fail. H&M as well as Zara make shit clothes, period. You buy a 10EUR shirt its gone after two washings or is utterly uncool in 2 months. You buy 30EUR shirt by any other non-Mcshit producer, you keep it for 3 years. The peasants have no money to burn - hence no more McShit for them. Its the same with food, you buy McShit for 2EUR and you are hungry in 30 min. You eat normal human food 5EUR, you are full in the next 6 hours. (except if you are obese) "I am not rich enough to buy cheap shit"