High stock levels dent H&M’s first quarter results

The world’s second-largest fashion retailer Hennes & Mauritz (H&M), which is already facing tough competition from more agile fast-fashion companies in many of its developed markets, has suffered another blow following last week’s announcement of its results for the first quarter of 2018. Revenues were slightly down, and profit after financial items fell from SEK 3.2 billion to SEK 1.3 billion. This resulted in another drop in H&M’s share price, which has long been in decline and has fallen by over 60 percent over the past three years.

Not only is revenue down, but inventory is also up (by nearly 7% compared with 2017) as is the cost of goods sold (CAGS) and selling, general & administrative (SG&A) expenses. This substantial increase in H&M’s value of unsold goods, which amounts to over SEK 33 billion (over EUR 3 billion) despite substantial clearance sales that have seemingly only served to reduce product margins, is a particular red flag for the retailer’s investors. H&M blamed this on the wrong mix of stock at its flagship brand and “unusually cold winter weather” that had delayed consumer purchases of a new spring/summer wardrobe.

According to analysts, the fact that H&M is lagging behind in terms of e-commerce is not the only root cause of this situation. Other possible contributing factors include a shift in consumer perception of the quality of the brand, H&M losing touch with its customers, the need to further optimize planning and supply chain management as well as demand forecasting, and potential fragmentation in terms of its brands (which currently stand at eight and the ninth is in the pipeline).

“The rapid transformation of the fashion retail sector continues. As communicated previously, the start of the year has been tough. 2018 is a transitional year for the H&M group, as we accelerate our transformation so that we can take advantage of the opportunities generated by rapid digitalization,” stated CEO Karl-Johan Persson in the report accompanying the announcement. The H&M share price has since climbed again slightly.