H&M admits "mistakes" in handling shift to online as profits drop

Global fashion giant H&M has admitted it has made "mistakes" in handling the shift to online of the fast-fashion shopper as it reports a lower-than-hoped-for growth of 3% in 2017 and a drop in profits.

In the full year to 30 November the group achieved sales excluding VAT of SEK 200,004 m (2016: SEK 192,267 m) while profit after financial items amounted to SEK 20,809 m (down from 2016's SEK 24,039 m).

The final quarter of the year, from 1 September to 30 November, was particularly challenging with sales down 4% at SEK 58,481 m (2016: 61,098m) and profit after financial items taking a steep drop to SEK 4,873 m (2016: 7,409 m). The group put the weakened performance down to slower sales within the H&M brand's physical stores, which led to increased promotions and handling costs.

Chief executive Karl-Johan Persson said online sales and the group's newer brands - its portfolio includes ARKET, Cos, Weekday, & Other Stories, Monki and Cheap Monday - had performed well, but its core fast-fashion brand had struggled. "The weakness was in H&M’s physical stores where the changes in customer behaviour are being felt most strongly and footfall has reduced with more sales online. In addition, some imbalances in certain aspects of the H&M brand’s assortment and composition also contributed to this weaker result," he said.

ARKET Regent Street

"But our performance does need to be seen in the wider context of the transformation that the industry is going through. Underneath the disappointing recent performance, we see reasons for optimism and good learnings but we need to accelerate the transformation even more," Persson added.

Analysts suggest that H&M has ridden the wave of fast fashion globally but has recently lost ground to faster, more agile rivals, such as ASOS, Boohoo and Zara, in part due to the fact it still sources most of its production in Asia and is therefore slower to market with new trends.

Pedro Aguilar, senior beauty and fashion analyst at Euromonitor International commented: “Much of H&M’s success can be attributed to the wider success fast fashion has had globally, however, while H&M was once a pioneer it now looks like the company has failed to keep up. In recent years younger more agile near pure online fast fashion companies like ASOS and boohoo have slashed average lead times, almost pushing out new items at a continuous pace."

"H&M still remains heavily reliant on Asia for the majority of its production and consequently has significantly longer average lead times and even lags well behind rival Inditex which mostly produces at home in Spain and neighbouring countries to stay highly responsive to consumer demand. And this, time from design-to-shelf, is crucial in today’s fashion world," Aguilar said.

"Ultimately as a direct consequence of fast fashion, consumers have become accustomed to a constant flow of new designs with trends emerging and fading more rapidly than ever before. A slow supply chain also means being unresponsive to consumer demand, which is perhaps why H&M has tried to diversify sales away from its eponymous brand to decrease its current reliance on fast fashion," he added.

H&M group continued to expand its store estate during 2017 as a total of 479 stores were opened and 91 stores were closed, resulting in a total net addition of 388 new stores. Online it entered eight new markets and five new store markets were entered for H&M.

It also been working to diversify from its core brand and last year launched its new department store-style retail concept ARKET, the first of which was opened on London's Regent Street in August. At the end of 2017 it also revealed it was working on a new brand targeting millennials. Called /Nyden, the brand will be developed and designed using input from influencers and customer data and will only be sold online and at pop-up events.

Afound: both online and physical stores

This morning it also confirmed reports from earlier this month that it plans to open a giant online off-price fashion outlet selling its own brands and a selection of third party brands. Afound will also have some physical stores with the first opening in Stockholm, Sweden at the same time as the website launches later this year.

"All in all, we feel 2017 was a year where we made more steps forward and did more groundwork for the future, but we have also made some mistakes that have slowed us down. The industry changes are challenging everyone and this will continue in 2018. The new fashion landscape requires skills and resources to adapt and seize the new opportunities. In particular the ability to take a long-term view and to navigate through some inevitable turbulence. By long-term investments, we have built a solid platform for many years of continued growth," Persson said.