H&M upbeat on H1 despite "challenging" US, says online is surging, COS powers ahead

By

Sandra Halliday

Published
Jun 29, 2017

Fashion retailer H&M issued a generally upbeat first-half report on Wednesday. The Swedish giant said its sales in the six months to May 31 rose 9%, that online sales are surging, that its COS brand is now an SEK10bn label, and that it will open a net figure of 400 new stores across the group this year.

But more of that later. To start, let’s look back at the last six months, a period when the company said that sales in the UK, Scandinavia and Eastern Europe as well as in many of its growth markets were “good”. But it also said they were “more challenging” in several of its major markets such as the US, China, the Netherlands and Switzerland.

This shows that even a dominant giant such as H&M is not immune to the headwinds battering the fashion retail sector at present, but it also shows that size and an ability to be innovative and nimble are carrying it through.

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THE NUMBERS

Group sales including VAT increased by 9% to SEK113.9bn (£10.3bn/$13.36bn/€11.7bn). Excluding VAT they were SEK98.3bn and in local currencies they increased by 5%. The company didn’t issue any comparable sales figures and given the large number of stores it continues to open, these would have been lower than the total sales numbers.

Profit after financial items in the six months increased by 6% to SEK 10.92bn and post-tax profit rose to SEK8.35bn from SEK7.9bn.

The group said that online sales continued to develop “very well” and carried on increasing their share of the group’s total sales figure.

And the company said its basket of brands, including  COS, & Other Stories, Monki, Weekday and H&M Home, as well as the core H&M fashion brand, “remained very strong, both in stores and online”.

The company didn’t give much away much about current trading, apart from saying it expects group sales including VAT for June to increase by 7% in local currencies, although analysts had been predicting an 8% rise.

But it did say that Q2 sales including VAT rose 10% to SEK59.5bn, beating the 9% first half figure, even though in local currencies they matched the first half overall with a 5% rise.

Q2 gross profit rose, mostly explained by “continued expansion and tight cost control” and corresponded to a gross margin of 57.1%, although this was down from 57.6% a year ago. Q2 profit after financial items increased by 10% to SEK7.7bn and after-tax profit was up to SEK 5.89bn from SEK5.35bn, which was more than analysts expected.

ONLINE STRENGTH

While online was key during the six-month period under review, the company expects it to become even more important in a relatively short timescale. Describing fashion retail as “an industry in transition,” H&M said that it is going through “a period of extensive change because of increased digitalisation. Customer behaviour and expectations are changing at an ever-increasing pace, with a greater and greater share of sales taking place online.”

It sees “great opportunities” in this area as it is “in a strong position, with well-known global brands suited to both physical stores and online sales, and [is] financially strong and can invest at the pace required.”

The company said that online profitability is in line with that of its stores and that in some established markets, e-sales already account for 25% to 30% of the total.

No surprise then that it expanded its e-store offer to six new markets during the period with Turkey, Taiwan, Hong Kong, Macau, Singapore and Malaysia adding to the previous 35 e-stores for a new total of 41.

The Philippines and Cyprus will also open e-stores this year and India, among others, will be a new H&M online market in 2018. As a result of this, it’s estimated that the group’s online sales will grow by at least 25% a year in the future.

STORES AND BRANDS

But while online is key, stores are also a big focus and the company plans to open 500 this year, while also closing another 100. It’s also revamping existing sites and adding new space to them. These revamps and extensions “include new forms of visual expression for a more inspiring  in-store experience” and also make the most of the firm’s work to increase the “speed, efficiency and flexibility of the supply chain.”

The group saw successful store openings in new H&M markets Kazakhstan and Colombia this spring and these will be followed by openings in Iceland, Vietnam and Georgia. Uruguay and Ukraine are planned for next year.

Not all of these new stores will be for the core H&M brand, of course, and the company is putting heavy backing behind its other brands on the physical store front, as well as preparing to launch its new Arket chain. That will debut with five stores and 18 online markets.

This diversification  strategy appears to be paying off. H&M said that COS, one of its earliest ‘other’ labels, will reach turnover of around SEK10bn this year, with profitability in line with that of the H&M brand. “The value of COS today already far exceeds the amount we invested in it and this is just the beginning of the journey,” CEO Karl-Johan Persson said.

He added: “& Other Stories, Monki, Weekday, Cheap Monday and H&M Home are very well-positioned to make the same journey as COS. We are expecting our newer brands to continue to grow substantially for many years to come and to account for an increasing share of the H&M group’s growth and value.”