H&M Hit by Discounting, Slowness to Embrace Digital -- Update

By Dominic Chopping and Saabira Chaudhuri Features Dow Jones Newswires

Shares in Hennes & Mauritz AB fell sharply Thursday after the fashion retailer said profit sank in the third quarter amid a heavy bout of price-cutting and fewer visitors to its stores.

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The company said it initiated a period of "aggressive markdowns" over the summer after entering the third quarter with too much stock. H&M said that while the move helped shift inventory and clear the way for its new autumn range, sales slowed somewhat toward the end of September.

The downbeat results underscore the diverging fortunes of H&M and its main rival, Zara owner Inditex SA -- which reported upbeat earnings earlier this month -- as well as the cost of the Swedish company's sluggishness to embrace digital.

H&M has lagged behind competitors in the move to online sales and although its digitization process is now in full-swing, growing online sales didn't fully compensate for reduced footfall at stores in several established markets.

"The fashion retail sector is growing and is in a period of extensive and rapid change as a result of ongoing digitization," Chief Executive Karl-Johan Persson said.

"The competitive landscape is being redrawn, new players are coming in and customers' behavior and expectations are changing, with an ever greater share of sales taking place online."

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For the third quarter, H&M reported a 20% fall in net profit to 3.84 billion Swedish kronor ($471.2 million), missing analysts' forecasts of 4.07 billion kronor. Sales, excluding value added tax, rose 4.5% to 51.23 billion kronor. Gross margin fell to 51.4% from 54.0%.

Shares in the company traded down about 6% in early trading.

Fast fashion retailers are feeling pressure amid the move to online sales, which has forced them to invest in delivery and logistics at a time when price competition is increasingly fierce.

H&M, Zara and Associated British Foods PLC-owned Primark are all fighting against one another as well as a slew of small online-only brands that pay little to advertise on Facebook and Instagram and sell directly to shoppers. Amazon has also increasingly been investing in its own fashion offering, putting further pressure on the industry's profit margins.

In response, H&M has moved to diversify away from its core mass-market H&M brand into more premium apparel. Last month it opened the first store for its new brand "Arket" on London's bustling Regent Street. It also has brands including Cos, Monki and Weekday, although these remain small revenue contributors making up an estimated 5% of group sales according to RBC.

Still, H&M says its online sales are growing at a rapid pace as it opens in new markets and invests in click and collect, next-day delivery and returns-to-store services. It has also worked to improve its supply chain and shorten lead times.

Online sales now account for as much as 25% to 30% of total sales in some markets and the company estimates group online sales will grow by at least 25% a year going forward.

The company's growth plans also involve opening more physical stores, although numbers have been reduced.

The group had 4,553 stores as of Aug. 31, a 10% increase from the 4,135 stores it had at the same time last year, and it plans to add a net 385 stores this year, compared its forecast of 400 stores at its second quarter earnings.

Write to Dominic Chopping at dominic.chopping@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

September 28, 2017 06:21 ET (10:21 GMT)