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Xinjiang Backlash Likely Culprit in H&M’s China Sales Slump

H&M’s solid second-quarter bounce back of 75 percent currency-neutral sales growth pushed the fast-fashion retailer to a 12 percent sales increase in the first half of 2021. In the half, the company generated 86.6 billion Swedish kronor ($10.1 billion).




The fast-fashion retailer swung to a net profit of 2.77 billion kronor ($323 million) in the second quarter, outperforming expectations of 2.66 billion kronor ($310 million) from analysts polled by FactSet. The quarterly profit was a significant shift from the net loss of 4.99 billion kronor (then a $530 million loss) a year earlier.

In a Nutshell: However, H&M still has work to do to get back to pre-pandemic levels. The company’s first-half sales remain more than 20 percent off 2019 totals, which came in at 108.5 billion kronor (then $11.4 billion).


On a quarterly basis, all markets saw year-over-year sales growth except for China, where currency-neutral sales dropped 23 percent. The results are likely tied with consumer boycotts of H&M in March after the brand cut ties with cotton producers in the country’s Xinjiang Uyghur Autonomus Region (XUAR), where allegations of forced labor have been levied by global governments including the U.S.

China is H&M’s third-largest individual market by sales, behind the U.S. and Germany, and second-largest in number of stores, behind the U.S.


During the first half, approximately 1,800 of the retailer’s 4,900 stores—nearly 36 percent—were closed at a time due to the Covid-19 lockdowns throughout Europe, but that number has now dwindled to 95 locations.

Net sales from June 1-28, the first month of the current third quarter, increased by 25 percent in local currencies compared with the corresponding period last year, H&M said. Compared with the same period in 2019, sales decreased by around 4 percent. In its preliminary sales totals released in June, sales from June 1-13 increased by 35 percent year over year and were up 2 percent on a two-year basis.


Sales are still affected by reduced footfall as a result of continued restrictions and store closures.

In the first half of 2021, H&M opened 50 stores (including franchises) and closed 155 stores, marking a net decrease of 105 stores. Most of them (69) were in Europe in Africa. For the full-year 2021, the retailer reiterated its plan to close approximately 350 stores, while opening just over 100 new stores, resulting in a net decrease of around 250 stores. Most of the openings will be in growth markets while closures will mainly be in established markets.


The first H&M store in Panama is scheduled to open in the second half of 2021 via franchise, while a franchisee will open the first Cambodia store in 2022.


H&M Group said it is continuing to renegotiate “a large number” of leases as part of the company’s store optimization, which also involves rebuilds and adjustment of the number of stores and store space to ensure the best store portfolio in each market. The group’s contracts allow nearly one-third of leases to be renegotiated or exited each year.


In March, H&M opened an online in Qatar via franchise and also launched H&M on the e-commerce platform Zalora in Indonesia, the Philippines, Malaysia and Singapore. The retailer plans to launch its high-end Cos brand online in Australia at the start of 2022.


Total inventory at H&M decreased 10.3 percent to 35.9 billion kronor ($4.2 billion) from 40 billion kronor ($4.7 billion) in the first half of 2020.


For the six-month period, gross profit increased to 44.1 billion kronor ($5.1 billion) from 41.3 billion kronor ($4.8 billion), corresponding to a gross margin of 50.9 percent. Gross margin for the period jumped 150 basis points (1.5 percentage points) from 49.4 in the year-ago half.


For the second quarter, gross profit increased by 89 percent to 25 billion kronor ($2.9 billion) from 13.3 billion kronor ($1.55 billion). This corresponds to a gross margin of 53.9 percent, which saw an uptick of 760 basis points (7.6 percentage points) from 46.3 percent last year.


In the quarter, external factors that influenced purchasing costs were “overall slightly positive” compared with the same purchasing period the previous year, leading to the improved gross profit and gross margin.

Additionally, the fashion retailer’s costs for markdowns in relation to sales decreased by around 3 percentage points in the quarter on a year-over-year basis.


H&M said that the external factors for third quarter purchases are expected to continue to be “slightly positive.”


In an earnings call, head of investor relations Niles Vinge said the current supply chain disruptions “are not material and not affecting the top line.”


“If we look ahead then, we are not unaffected by some of the cost increases, but we see that we have really strong plans to mitigate them. So we see them as non-material, but still existing and something that we actively manage looking ahead,” Vinge said.


Cash and cash equivalents totaled 23.4 billion kronor ($2.73 billion), nearly doubling the comparable period’s end total of 12.7 billion kronor ($1.48 billion). In addition, the retailer has undrawn credit facilities of 20.1 billion kronor ($2.34 billion).


Net Sales: The fast fashion retailer’s net sales in the first half amounted to 86.6 billion kronor ($10.1 billion), 12 percent ahead of the 83.6 billion kronor (then $9 billion) taken in last year in local currencies. Online sales increased by 47 percent in the six-month period on a currency-neutral basis, and 39 percent in kronor.

For the second quarter, year-over-year net sales increased by 75 percent compared with the corresponding period last year, amounting to 46.5 billion kronor ($5.4 billion). Online sales increased by 40 percent on a currency-neutral basis in the quarter, while it grew 32 percent in kronor.


Net Earnings: In the first half, H&M posted a net profit of 1.7 billion kronor ($198 million), or 1.03 kronor per share (12 cents per share), compared with a loss of 3.06 billion kronor ($356 million) in the year-ago period, or a 1.85 kronor per share loss (22 cents per share loss).


Profit after financial items increased to 2.2 billion ($256 million) kronor in the half instead of a nearly 4 billion ($464 million) kronor loss.


For the second quarter, the retailer saw a net profit of 2.77 billion kronor ($323 million) compared with a loss of 4.99 billion kronor ($530 million) in the year-ago period.


Profit after financial items increased to 3.6 billion kronor ($419 million) for the quarter, well ahead of the 6.48 billion kronor ($756 million) loss in last year’s second quarter.


CEO’s Take: When asked about whether inflationary pressures would impact costs on sustainable materials, or even offset progress to be made on markdowns mitigation, CEO Helena Helmersson remained confident in the company’s continued efforts to drive demand for eco-friendly components.

“We have invested in sustainable materials for so many years,” Helmersson said in the call. “It’s about supply and demand, right? So, we can help increase the demand and that will also gradually have a consequence on the cost. So I would say that when we try out new sustainable materials, we will have to invest and always try to be guided from a customer point of view.”

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