H&M's Q3 dented by markdowns, plans new chain for 2018
H&M sales rose in the first nine months of the year, and in Q3, but maybe not by as much as it would have liked and its profit was dented due to excessive markdowns.
But the fashion retail giant had plenty of upbeat news too when it delivered its figures on Thursday. The biggest news was that it will open another new brand next year. But while that was a tantalising snippet of information, the company rather frustratingly gave no more details.
It did say that its “new brands….are growing rapidly and have great future potential,” that "creating and launching new brands is an important part of our growth strategy,” and that the still-new Arket is going well so far (more of that later).
It also said that September has started well, although the end of the month appears to be sower than the start.
But what about those sales and profit figures? It said Thursday that sales for the nine months to August 31 were up 7% including VAT to reach SEK173.29 billion (around $21bn/£16bn/€18bn). They rose 7% with sales tax factored out too, but in local currencies they were only up 4%.
The company’s pre-tax profit in the period after financial items fell to SEK15.936 billion from SEK16.630 billion a year ago and after tax it dipped to SEK12.191 billion from SEK12.722 billion.
And it seems that Q3 wasn’t the best performance of the year. Here group sales including VAT rose only 5% to SEK59.383 billion, although the local currency figure (a 4% rise) matched the nine-month period overall.
It looks like the margin was under pressure during the quarter with gross profit of SEK26.35 billion equalling a gross margin of 51.4%, that was down from 54% a year ago. Post-tax profit in Q3 dropped to SEK3.837 billion from SEK4.82 billion as those aforementioned markdowns ate into earnings.
The company said that it resorted to “large markdowns in order to give the autumn garments the best possible conditions for the new season.”
Over the nine-month period, the sales performances in its top 10 markets varied widely. In number one market Germany (in local currency) sales fell 1%, although that market also had a net loss of two stores. In second market, the US, they rose 3% on the back of 43 extra stores, and in the UK they rose 6%, even though closures meant a net balance of three fewer stores. French sales were flat, again, despite store closures, while China rose 8% as it added 46 new locations.
The sales report had some good news with “continued rapid and profitable growth of the group’s online sales,” which in some of its established markets already account for between 25% and 30% of total sales. E-sales are expected to grow by “at least” 25% a year from here.
And the Cos, & Other Stories, Monki, Weekday and H&M Home banners “had a continued very good development” while it hailed a “successful reception of the new brand Arket in London as well as online in 18 markets.”
Give the online progression, it’s no surprise that the company is ramping up its e-store expansion and will open in a further two markets before the end of the year - the Philippines and Cyprus - in addition to the six online markets that have already opened in 2017. The rollout of online markets will continue during 2018 with, among others, India. The plan is to offer e-commerce in all of the store markets in the future as well as in other markets.
It continued to add new stores in the last nine-months too and added new countries to H&M’s roster with Kazakhstan, Colombia, Iceland and Vietnam. Georgia will open later this autumn and new H&M store markets are planned for 2018 with Uruguay and Ukraine to be added.
CEO Karl-Johan Persson said of all this: “The fashion retail sector is growing and is in a period of extensive and rapid change as a result of ongoing digitalisation. The competitive landscape is being redrawn, new players are coming in and customers’ behaviour and expectations are changing, with an ever greater share of sales taking place online.
“This shift is clearly reflected in our online sales, which continue to develop very well. However, our growing online sales did not fully compensate for reduced footfall to stores in several of our established markets, which has resulted in our total sales development not reaching our targets so far this year.”
As mentioned, that meant it entered Q3 with inventory levels that were too high but Persson said that “through our aggressive summer sale we succeeded in improving the inventory position. This contributed to the autumn collections getting off to a good start, although sales slowed somewhat towards the end of September. As always, however, sales should be viewed over a whole season.”
What can be done about the inventory position in future? The company said that it’s using tech to enable “improved purchasing methods that allow shorter lead times and greater precision” when planning the product range. “Faster lead times, a more efficient supply chain and more purchases during the season provide us with great opportunities to achieve lower stock levels in future,” it added.
So what else is the company doing to improve the situation? Obviously, online development is key with more and faster delivery options as well as a wider product choice. But omnichannel is also key with the company focused on “continued integration and development of our online store and our physical stores.”
Persson said “the physical store is increasingly being integrated with the online store for a more convenient shopping experience. We are also testing out new store concepts for H&M, to offer our customers an even more inspiring store.”
On the store front, in its established markets, it’s focusing on “optimising the store portfolio through renegotiation, rebuilds and relocations, adjustment of store space and through closures.”
That will result in a total of 90 closures this year with a net balance of 385 more stores than a year ago. “We still see good potential for more physical stores primarily in many of our growth markets,” Persson said.
And of course there’s that new chain to come. We have no details yet, but based on past behaviour with Cos, & Other Stories, and Arket, the company could be planning an opening on Regent Street in London. Let’s keep our eyes open for any suitable vacancies on the street.
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