• Wall Street Journal

H&M Turnaround Will Take More Than Cooperative Weather

Swedish retail giant H&M is still under the weather.

September sales were roughly 1% higher than in the previous year, according to a preliminary estimate released alongside results for the quarter through August. Given that H&M continues to expand store numbers by its long-term target of 10% to 15% a year, like-for-like sales must have shrunk dramatically—by 7%, estimates Citi.

In a familiar refrain, the company blamed the weather. Spring collections were slow to sell because of a cold April. Now autumn collections have been slow to sell because of a late-summer heat-wave across Europe.

Not only does this weigh on the company’s revenues; it also sets it up for lower margins, because unsold clothing may need to be discounted. At the end of August, H&M’s inventories already amounted to 16.6% of annual sales, up from 14.4% the previous year. The September sales figures suggest the situation has only worsened since. The company said competitors were already being panicked into cutting prices.

Management sought to salvage some hope with an elusive reassurance that “the fast pace of investment is to some extent gradually starting to subside.” Heavy spending on a more integrated e-commerce operation has weighed on H&M’s margins in recent years.

But the company also said it would probably launch two new brands next year—one more than previously indicated—and consider bringing its inventory-tracking and e-commerce platforms further in line with those of its nemesis Inditex, which owns the Zara chain. Such investments look necessary in light of H&M’s underperformance this year, but won’t come cheap, nor fast.

Long-suffering H&M investors have one valid comfort: the stock is much less chic than it used to be. Its valuation premium over the European average is near 12-year lows. That—and the predictability of the weather effect—explains why the market shrugged off the bad news Friday morning.

Still, judging by the latest numbers recovery remains a distant prospect.


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