H&M and Zara are closing stores to Get Ahead

By guest author Geoffrey Smith from Fortune

The Retail Apocalypse is far from over

Over 7000 store closings have already been announced in 2019.

Europe’s fast fashion giants may have been slow to wake up to the threat posed by e-commerce, but it looks more and more like they have raised their game enough to survive—and maybe even prosper.

An employee arranges clothes at an H&M in Budapest, Hungary. The fast fashion chain has pulled off an impressive 18-month turnaround (all captions courtesy by Fortune)

Hennes & Mauritz, the Swedish company behind H&M, Monki and Weekday, and Spain-based Inditex (owner of Zara and Massimo Dutti) are both seeing the benefits of decisions taken last year to trim their networks of physical stores and throw more resources into online sales.

Eighteen months ago, H&M was still struggling with another makeover of its online store and seemingly hell bent on opening more stores that would never pay for themselves. Fast forward to this summer—a tumultuous one for stocks—and H&M has managed to hold on to the 15% gain it made when it announced its most recent quarterly earnings in late June. The results were notable for two reasons: one, its summer collections arrived with a bang, with sales rising 12% from a year earlier; second, it said it expected to whittle away its unsold inventory for the fourth quarter in a row, and forecast it would continue falling through the fiscal year-end. Shares are now up by one-third from the 14-year low they hit last August.

A big factor in H&M’s turnaround is the critical eye it is cast at its store footprint. After closing about 140 stores last year, H&M has revised down its plans for store openings this year from a net 175 worldwide to 130, and guidance for continued “optimization” of its store portfolio hints at further pruning. (A company spokeswoman declined to say whether the targets would see more revisions given the ongoing global slowdown.) Chief Executive Karl-Johan Persson told investors that some openings may be delayed while the company waits for more acceptable rent levels. More immediately, it is cutting overcapacity in Europe, with a net reduction in H&M brand stores across the continent this year.

Zara parent Inditex, meanwhile, saw its global store count triple to nearly 7,500 under former CEO Pablo Isla. While some of that reflected a valuable diversification of the group’s portfolio to include upscale Massimo Dutti and youth-focus Bershka, the expansion left it with many stores that couldn’t pay their way in the age of e-commerce. Isla reacted by closing 355 stores last year, 76 % more than he had originally planned. This year under new CEO Carlos Crespo, the company is set to close another 250, while opening 300. Inditex did not respond to a request for comment.

At one point, the store count of Spanish retail giant Inditex reached nearly 7500 worldwide

But, despite store shutterings, both H&M and Inditex are still in growth mode in the realm of brick-and-mortar with net store count expected to increase this year at both chains. That is remarkable in a year when, according to Coresight Research, U.S. retailers have already announced more store closures than they did in the whole of 2018. The industry, including homegrown icons such as Gap and Abercrombie & Fitch, has announced some 4500 net store closures so far in 2019 (and over 7500, unadjusted for new openings). For the whole of 2018, net closures just topped 2,600.

As it fine-tunes its physical footprint, Inditex is rapidly expanding its online presence

The two companies’ plans for online sales this year are even more striking. (A bold approach is perhaps merited, given that both firms report online sales that are still less than 15% of overall sales. For comparison, around 27% of U.S. apparel sales take place online.) Inditex has already opened online stores this year in Saudi Arabia, the United Arab Emirates, Lebanon, Egypt, Morocco, Israel, Serbia, and Indonesia (serving a combined population of nearly 500 million), and it plans to have stores up and running for its fall/winter collections in South Africa, Qatar, Kuwait, Bahrein, Oman, Jordan, Colombia, Philippines and Ukraine (another 275 million).

Pablo Isla

“We want to make our fashion collections available to all our customers, wherever they are in the world,” Isla said in May, “even in those markets which do not currently have our bricks-and-mortar stores.”

H&M, meanwhile, is promising big upgrades to its online store, including H&M’s improved navigation and product presentation and shorter delivery times (the latter in particular being an area where it has compared unfavorably to online-only rivals such as Zalando, Boohoo, and, of course, Amazon.com). It also promises more flexibility in payment, building on its investment in fintech unicorn Klarna last year.

All of the corporate rewiring is, admittedly, taking its toll. H&M is likely to report falling profits this year due to high investment costs, and it had to raise its borrowing to fund last year’s dividend payment. After a dividend increase earlier this year, Inditex is now paying out some 80% of its annual profit to shareholders, which sits uncomfortably with arguments from Morgan Stanley analyst Geoff Ruddell that the company has used some obscure—albeit legitimate—accounting methods to give a flattering account of its profitability over the last four years. 

Even so, with a market value of 85 billion euros, the Inditex empire of Amancio Ortega, the richest retailer on Earth, can probably survive a mistake or two. Persson’s H&M also seems to have the worst behind it. Plenty of other retailers would be glad to boast as much.

www.hm.com

www.zara.com

www.inditex.com

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