H&M may never catch up

The world’s second-largest clothing retailer hasn’t done enough to stop its business fraying

By guest author Stephen Wilmot from Wall Street Journal

H&M needs a more radical restyling.

The world’s second-largest fashion chain by sales has fallen behind as consumers have moved online. Despite a big decline, the stock hasn’t priced in the new reality.

For years, Hennes & Mauritz delivered metronomic profit growth by rolling out new stores, most of them under the namesake H&M banner. Consumers loved its combination of low prices, high fashion and convenient locations.

About three years ago, however, the formula stopped working. The Swedish company was slow to react as consumers—and other retailers—moved on.

One change was the rise of online fashion via companies like Amazon’s Zappos in the U.S. and Zalando and ASOS in Europe. Another was the expansion of offline discounters like Primark, a European chain that now has nine U.S. stores, the most recent of which opened in Brooklyn, New York, last month. Zara-owner Inditex, the world’s top clothing retailer, used a more flexible and rapid sourcing model to meet fashionistas’ desires for novelty in a way that H&M’s design setup—with most clothes ordered a season in advance—couldn’t. Compared with more innovative peers, H&M no longer seems so chic, or convenient.

The company is now addressing these deficiencies, but too late and too timidly. The scale of the transformation required is daunting. It will take time and money, with no guarantee of success.

H&M’s stock has fallen more than 60% in the past three years as profits have plunged and the scale of the company’s problems has become clear. But it could fall still further. A valuation of more than 15 times 2018 earnings offers little compensation for the costs and risks of a turnaround operation. Analysts are currently penciling in modest growth in profits next year, but the consensus forecast is predicated on an improvement in sales.

There was little evidence of the long-awaited improvement in the latest results. The company doesn’t report like-for-like sales growth, but UBS calculates that this crucial figure was minus 4% for the quarter through May, only marginally better than the recent trend. And inventories as a share of sales hit a new high in June, implying that H&M’s summer offerings didn’t resonate with consumers. The company will be aggressively clearing clothes in the current quarter, hitting margins.

Chief Executive Karl-Johan Persson, grandson of the founder, has started investing more aggressively in the logistics required to speed up the supply chain and integrate online and store operations—with mixed results so far. He has been less forceful in shuttering underperforming stores. He will close just 150 outlets this financial year out of a total approaching 5,000. The recent sales trend suggests many more closures are necessary, while the remaining stores may need refurbishment to bring back shoppers.

H&M has faced the costs of inaction, but not yet the costs of action. A turnaround is still uncertain and far off.