H&M Can't Really Be Dumb Enough to Make This Mistake

By Markets Fool.com

The fast-fashion leader may have just shot itself in the foot. Image source: The Motley Fool.

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Fast-fashion leader H&M (NASDAQOTH: HNNMY) hasn't made many mistakes over the years as it transformed the industry and became a retail icon. But it's about to make the same fashion faux pas Abercrombie & Fitch (NYSE: ANF)did, and by shooting itself in the foot, it could stumble badly from the backlash.

Hurry up and change

H&M became a fashion powerhouse by taking fashion runway designs and stripping them down to their essentials before quickly putting them onto store shelves. Rather than the months it takes traditional retailers to get designs into stores, H&M pioneered streamlining the process to do it in weeks.

It isn't alone in doing so, with rivals like Forever 21, Uniqlo, and Zara also blazing paths in the trend toward disposable clothing. These aren't designs made to last through the ages, but rather just until the next new thing comes out.

Their success has led to a host of imitators among traditional retailers including Abercrombie & Fitch, which essentially turned its California surf brand Hollister into a fashion-forward concept, and Gap (NYSE: GPS), which did the same with its Old Navy brand (a similar attempt at the more upscale Banana Republic, though, failed miserably). Even department store chains jumped on the bandwagon with J.C. Penney launching the fast-fashion Belle + Sky line and Sears Holdings debuting Now + Here.

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Lack of staying power

However, the excess of wannabes and a dicey economy has led to a slowdown in fast fashion's rise. Aside from sales faltering at Abercrombie and Gap, even H&M has experienced a tougher environment that makes its business model of opening ever-more stores a more difficult and sprawling operation to manage. It now has some 4,000 stores in 62 markets.

Sales in the second quarter rose only 2% from the year-ago period, and profits tumbled 17%, below even analysts' lowered expectations.The weakened market for its fashions has led it to branch out into new directions, including introducing lines of sportswear, makeup, and even home furnishings.

There is concern that those diversions are a mistake, that by moving away from its core competency, it risks "deworsifying," in the words of investing legend Peter Lynch. But even in its main fashion business, it might be compounding its errors.

Lacking good taste

Back when Abercrombie & Fitch was at the top of the teen retail industry, it boorishly held itself to an elitist standardrefusing to carry clothes bigger than a size 10. Its then-CEO Michael Jeffries was quoted as saying, "That's why we hire good-looking people in our stores. Because good-looking people attract other good-looking people, and we want to market to cool, good-looking people. We don't market to anyone other than that." Uglies, fatties, and dweebs could just walk on by its stores.

That sort of attitude was fine when you're riding high and kids are clamoring for your clothes, but teen tastes are fickle, and fast fashion's rise caused Abercrombie's sales to crumble. It was left desperately pleading a mea culpa (and getting rid of its CEO) to those once unwanted shoppers. Abercrombie quickly began carrying plus-sized clothes in its stores.

It wasn't the only teen retailer snubbing that market, though. Retailers like Urban Outfitters, Express, and J. Crew all snubbed the plus-sized market, at least in their stores, as they often failed to carry clothes above a size 12, although they may have had them in their online outlets.

An unraveling thread

Now H&M is making the same mistake. According to Revelist, a site focused on millennial women, the fast-fashion leader quietly pulled all plus-sized clothes from a number of stores in New York City. When it asked the retailer why, it basically said if customers want those sized clothes they could shop its online store, but it needed the space for all the cool new things it was trying out, like beauty supplies and home furnishings.

"This means not all stores have room for all our fashion concepts," H&M said in a statement. "We refer customers to our online store hm.com, which includes all our fashion concepts, and a broader assortment."

Industry site Style Mic noted it was an odd policy stance to take considering its willingness to feature plus-size models in its ad campaigns, and the site asked, "Where is the outrage?"

With the story starting to gain traction, it could initiate a backlash against the retailer for acting almost as obnoxiously as Abercrombie & Fitch. With sales slowing, competition intense, and consumer sentiment weak, that's a posture it can't afford to take.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Urban Outfitters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.