Swedish fast fashion retailer H&M is to reduce the number of stores it will open this year in favour of making more digital investments, amid a rise in first-half revenue.
In a sales update this morning (27 June), the fashion group said profit after tax amounted to SEK5.37bn (US$579.3m) for the six months to 31 May, compared to SEK6.01bn last year. H&M noted profit after tax in the previous year was helped by one-off tax income of SEK408m as a result of the US tax reform (Tax Cuts & Jobs Act). Profit after financial items slipped to SEK6.98bn from SEK7.28bn in the same period last year.
The group’s net sales increased by 11% to SEK108.49bn in the first half-year. In local currencies, net sales increased by 5%. H&M said its ongoing transformation work has driven more full-price sales, lower markdowns and increased market share.
Shares in the group were up by 9.69% on the news this morning.
H&M has trying to turn around slowing sales and falling profits in the last few years, largely due to declining footfall at its namesake stores. Earlier this month, however, the retailer hailed its transformation work as the group reported a double-digit rise in second-quarter sales, although profit after tax slipped to SEK4.57bn from SEK4.64bn last year.
Looking ahead, the retailer now says sales of its summer collections “got off to a very good start,” with net sales in June estimated to have risen by 12% in local currencies compared with the corresponding month the previous year.
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By GlobalDataIn addition, the group notes that the costs of markdowns in relation to sales will decrease by around 1.5 percentage points in the third quarter of 2019 compared with the corresponding period in 2018. This would be the fourth successive quarter with a reduction in markdowns.
H&M is also planning to open fewer new stores this year as it accelerates its “adaptation to customers’ changed shopping patterns and has therefore revised the number of new stores downwards in favour of even more digital investments. The net addition of new stores for full-year 2019 will therefore be around 130, which is 45 fewer than previously communicated.”
Thailand, Indonesia and Egypt will become new H&M online markets via franchise during the second half of 2019.
“The H&M group continues to increase full-price sales, reduce markdowns and increase market share, showing that customers appreciate our collections and the improvements we are making to the product assortment and the customer experience,” says CEO Karl-Johan Persson.
“Sales developed well in most markets. We had strongest growth in countries such as the US where we grew sales by 17%, in Mexico by 25%, in India by 39%, in Russia by 19% and in Poland by 11% in local currencies. We also grew in the UK and Sweden where we took market share despite challenging market conditions.”
Persson adds that the group’s efforts to integrate its physical and digital channels are driving costs in the short term.
“For example, our new online platform and our new logistics systems have not yet achieved full efficiency, but for customers have resulted in improvements such as faster and more flexible deliveries and a more seamless shopping experience. We have also increased the value for our customers through further investments in the customer offering so that we offer the best combination of fashion, quality, price and sustainability.”
Kate Ormrod, lead retail analyst at GlobalData, notes that even though seen against an “easy” set of comparatives, “efforts to strengthen its product ranges and availability are clearly resonating with shoppers, helping to drive full price sales and reduce markdowns.”
She adds, however, that profitability remains a sticking point, with first half operating profit still down on the year, and margin falling from 7.3% to 6.4%.
“The true test of its strategy lies in H2 where tougher comparatives can be found – though with the retailer reporting a strong June, with net sales expected to be +12% in local currencies, the signs are encouraging.”
She continues: “Though it planned to open a net 175 stores in FY2018/19, this has been revised down to 130 (with the retailer closing c.165 this year) as the value player rightly opts instead to invest in online as consumer spending shifts to this channel. Having been a laggard for so long, H&M’s investment continues apace as the retailer is still yet to fully harness the opportunities that lie within online.
“While H&M focuses on rolling out services such as click & collect and instore returns to other markets, it must not neglect other must-have features and fulfilment options that would elevate its online offer in the UK, such as a delivery saver scheme. While it now plans fewer store openings, minimising costs, the new strategy puts pressure on H&M’s existing stores and online operations to deliver.”
