H&M profits dive in ‘tough’ first half of year

Trouble shifting stock sent profits at fast-fashion chain H&M down by a third in the first six months of its financial year, the Swedish retailer said on Thursday.

H&M said profits “after financial items” were SKr7.3 million (€702,000) over the period to May 31st, and SKr6 million in the quarter between March and the end of May, while the group’s profit after tax for the half-year fell by nearly a third, to SKr6 million from SKr8.4 million last year.

Sales at the world’s second-largest fashion retailer remained broadly flat over the period, though poor trading at the start of the year was helped by a 2 per cent rise in the second quarter. Pretax profit for the quarter was also in line with last year’s figure.

“As we signalled previously, it was going to be a tough first half-year. We went into the second quarter carrying too much stock and we still had some imbalances in the H&M assortment – something that we are gradually correcting,” said chief executive Karl-Johan Persson.

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The company strikingly refused to confirm its full-year guidance of a “somewhat better result” this year compared with 2017, leading some to wonder if it had issued an implicit profit warning. Mr Persson told a press conference: “It has become tougher to reach the full-year guidance, but there is still half a year to go.”

H&M shares recovered after initially falling 4.6 per cent to stand 0.5 per cent higher on Thursday morning.

High stock levels

Analysts focused on H&M’s intensifying inventory problems after two years of persistently high stock levels. Stock-in-trade as a percentage of sales reached 18.2 per cent, up 2 percentage points from a year ago, and one of its highest ever levels despite Mr Persson vowing to cut it.

Although investments in online platforms were “starting to have results”, H&M said, total sales for the quarter “were not satisfactory, which meant that inventory levels were still too high at the end of the period”. Overall, the first half of the year was “somewhat more challenging than we initially thought”.

Nils Vinge, head of investor relations, said the high level of stock compared with revenues was in large part due to a stagnant top line. "It had been a long time since the growth has been so slow in the business. Of course, it's a concern. We work hard to get back to a leaner level."

But he added that there was a “difficult balance” between introducing new products and marking down products that do not sell fast enough. “What we need is stronger growth of full-price garments,” he said.

Mr Persson said updates to logistics systems over the second quarter of the year had hurt sales and profits, particularly in major markets such as the United States, France, Italy and Belgium.

H&M has been particularly vulnerable to changes in customer habits and the boom in online shopping, given its reliance on opening large numbers of stores, and said on Thursday it was “going through a period of transformation”. – Copyright The Financial Times Limited 2018