New Year discounts dent H&M but digital and new chains are sales drivers

By

Sandra Halliday

Published
Feb 15, 2018

Fashion retail giant H&M held a Capital Markets Day on Wednesday as it sought to soothe investor fears over its growth prospects following anaemic sales at its core chain.

And it chose to focus on the prospects for its newer brands and the digital channel as it said that 2018 profits should be boosted by e-tail growth of at least 25% this year. Meanwhile, newer brands like Cos, Arket and H&M Home should also sprint ahead with a similar growth level.

But the company wasn’t completely upbeat and said that "in view of the ongoing shift in the industry and the H&M group’s ongoing transition work, 2018 is expected to remain challenging. H&M’s sales in comparable stores are expected to remain negative with a gradual improvement during the year.”

It added that “a tough start with high opening stock levels from Q4 2017 and imbalances in the product range are resulting in high markdown costs, with a negative effect on earnings at the start of the year.”

CHALLENGES AND OPPORTUNITIES

H&M has been opening new chains at a relatively fast speed but as its statement shows, it has also been battling challenges at the original H&M business. For that chain, a combination of intense competition from both physical and online rivals, plus a few product missteps have held it back.

Those problems have caused the company’s share price to fall for several years now, although while the shares are significantly lower than their price of a year ago, they have been rising this month and continued their move upwards in early Wednesday trading.

This Capital Markets Day is a key development in driving that share price and is the first time the company has held such an event. In its release ahead of the day’s proceedings, the company said that as well as e-tail sales rises and new brands boosting growth at the moment, they should continue do so in fiscal 2019 through to 2022. 

The group also expects H&M's physical stores to return to growth from next year as it continues to open new locations. The company said that newly-opened stores have “very good terms and flexibility [and] the average payback period for new stores is less than 17 months.”

But given the surge it’s seeing in e-tail sales, that’s as much of a key focus for the firm and it said that its e-sales are “growing well and amounted to SEK29 billion,” in the last fiscal year, or 12.5% of total group sales. The online channel is also “showing good profitability and accounted for 22% of the H&M group’s operating profit.”

Online sales should rise by around 20% a year and reach SEK75 billion in 2022. That’s lower than the 25% predicted for the current year but is still a strong growth figure.

So it’s no shock that 45% of the group’s total investment spend in the past financial year was in digital.

NEW CHAINS

It’s also spending heavily on new brands. The core H&M chain is still the biggest business in the group with its “new business” (comprising Cos, Weekday, Cheap Monday, Monki, H&M Home, & Other Stories and Arket) all adding up to only 7% of its sales. 

Yet that percentage can only grow as the company rolls out new stores and websites for its smaller chains and their current SEK17 billion in sales is set to multiply as this happens. As mentioned, their sales are set to power ahead by at least 25% a year and should reach more than SEK50 billion in 2022.

H&M also said it expects store expansion to add 1% to 3% to sales each year and sees “great opportunities for further additional sales from two separate and completely new business models that the company is currently developing.”