Heavy investment in technology at the Swedish clothing retailer won’t match well with lower growth in Europe and China.
By guest author Carol Ryan from the Wall Street Journal.
H&M’s HM.B +2.54% scanty profit shows the high price of investing for growth. Now, a costlier supply chain, weaker consumer demand and war in Ukraine all threaten returns on that cash.
Shares in the Swedish fast-fashion chain fell 10 % in European morning trading after it reported a pretax profit for the three months through February that was less than half what analysts expected. After several years of spending heavily on e-commerce technology to catch up with Zara’s Spanish owner Inditex, H&M still needs to invest more in its supply chain and sustainability initiatives.
This would be more manageable if consumer spending were strong. However, after increasing sales 18% year-over-year in the three months through February, growth slowed to 6% in March. This may be an early sign that shoppers are cutting back on fashion purchases as inflation hits disposable incomes.
True, H&M stopped selling its goods in Russia, Belarus and Ukraine because of the war. Russia was one of the company’s fastest-growing markets and generated 4% of group sales. But sales slowed markedly in March even stripping out the conflict’s impact.
H&M wants to double revenues by 2030, which means growing by 10% to 15% a year. Demand in China still hasn’t recovered, a year after Chinese consumers boycotted the Swedish company for committing not to source cotton from Xinjiang. A weakening economy in Europe will make H&M’s expansion plans an even trickier fit.