H&M profits suffer after aggressive summer discounting

Swedish fashion retailer Hennes & Mauritz warned that a move away from stores to online shopping was intensifying, hurting its profit margins and sales, and sending its shares sharply lower.

Net profits for the world’s second-largest clothing retailer fell 20 per cent in the third quarter as it aggressively discounted its summer collection in an attempt to boost sales. Karl-Johan Persson, chief executive of the family-controlled group, said that while H&M’s autumn collection had got off to a good start, sales had “slowed somewhat” at the end of September.

Mr Persson added that the “competitive landscape is being redrawn [with] new players coming in and customers’ behaviour and expectations changing”. H&M’s online sales were going well but have not compensated for fewer customers visiting its shops, he said.

In the first nine months of its business year — to the end of August — sales rose just 4 per cent in local currencies, against a new annual target of 10-15 per cent.

Mr Persson told the Financial Times he was hopeful that the company could reach the target next year. “It’s an ambitious goal but it’s realistic. We have to be humble not having reached it this year or last. Also it is a challenging market,” he added.

Shares in H&M were down 6 per cent at SKr210.10 on Thursday afternoon.

H&M is being squeezed on all sides, losing out to online-only retailers such as Zalando and Asos as well as physical store chains that can undercut it on price such as Primark. Financially, it has been outshone by Inditex, the Spanish owner of Zara, which overtook it as the world’s largest fashion retailer several years ago.

Mr Persson said weak sales growth meant H&M had too much inventory, which in turn required it to hold a big summer sale to clear stock. Net profit in the third quarter fell from SKr4.8bn a year earlier to SKr3.8bn ($470m). Sales increased 5 per cent to SKr59.4bn.

H&M is responding by trying to boost its online sales. Although it refuses to reveal how much of its sales are online, the group said the figure should increase by at least a quarter this year. It added that in some markets, online sales already make up 25-30 per cent of its revenues.

Mr Persson conceded that “in a way, we are cannibalising a bit from our physical stores but I’m happy we’re doing that rather than somebody else doing it”.

It is closing about 90 stores this year — although it will still open on a net basis roughly 385 — and is aiming to focus growth on new and emerging markets, having recently opened its first shops in Colombia, Iceland, Kazakhstan and Vietnam. Mr Persson said it would review its store portfolio and further closures were likely.

H&M said it would invest more in online shopping, including giving customers different and faster delivery options and increasing the product range. It is also investing in its supply chain in an attempt to reduce the amount of inventory it holds and cut the time it takes to get products into shops.