On Wednesday the Swedish fast-fashion conglomerate Hennes & Mauritz posted lower than expected second-quarter sales in the midst of an aggressive expansion in its store count. Sales rose 2% to 54.34 billion kronor ($6.65 billion) in the three months through April, its slowest growth in three years, while profit fell 17% to 5.3 billion kronor ($0.65 billion). The outlook for the third quarter? “Not good,” say analysts from Credit Suisse.
Is concern warranted?
Michelle Grant, Head of Retailing at Euromonitor, says the year-on-year comparison doesn’t tell the whole story. She points out that H&M posted particularly strong sales growth in 2014 and 2015, and that current half-year sales are in line with pre-2014 sales levels.
CEO Karl Johan-Persson ascribed the lower sales growth to a stronger U.S. dollar, long-term capital investments—the company aims to open more than 400 stores this year—and higher overall markdowns due to unexpectedly cold weather.
The first two explanations seem reasonable, but there are reasons to question the cold weather argument.
European competitor Inditex , owner of fashion-forward Zara , posted a 6% rise in the same period. Unlike Inditex, which produces a good deal of its clothing in-house in Europe, H&M buys the bulk of its clothes in Asia on U.S. dollar contracts and sells most of them in Europe, which explains why a stronger dollar would have a higher negative impact on purchasing costs. By the fourth quarter, the company expects the impact to wane.
Capital investments to open new stores and build out its online retail presence are also cutting into short-term profits. H&M launched e-commerce operations in 9 countries this quarter, including Japan and Greece. The Stockholm-based company—which has 4,000 stores in 62 markets—plans to continue its store-opening spree, adding 10%-15% more stores this year with “continued high profitability.”
(Source: Forbes )