H&M in the red in H1, recovery starts but Q3 will still see discounts
Jun 26, 2020
H&M Group’s first half saw it making a bigger loss than analysts expected as the coronavirus crisis crushed profitability. And while sales are recovering, they’re still significantly down during June and it expects markdowns to be ongoing in Q3, even though e-sales remain high.
The company had already issued its Q2 sales figures earlier this month and on Friday explained just what those severely reduced sales meant for the bottom line.
Net sales for the entire half to May 31 fell 23% to SEK83.612 billion (€8bn/£7bn/$9bn) and the loss after financial items was SEK3.978 billion. And the post-tax loss was SEK3.06 billion.
For Q2, sales dropped to SEK28.664 billion from the SEK57.474 billion it had seen in the 2019 March to May quarter, although e-sales rose by 36% to partly make up for the drop. By mid-April, around 80% of the group’s stores were temporarily closed.
Quarterly gross profit was SEK13.284 billion, with a gross margin of 46.3%, down from 55.4%. It meant the loss after financial items was SEK6.482 billion and after-tax loss was SEK4.991 billion.
But the group’s liquidity remains good. On May 31, cash and cash equivalents amounted to SEK12.704 billion and with undrawn credit facilities added in, cash available totalled SEK31.241 billion.
Q3 SALES AND DIGITAL ACCELERATION
The company also updated on more recent sales with the drop for June (up to June 24) being 25% in local currencies year-on-year. Its stores have been opening steadily and at present only 7% of its total (that's 350 locations) are still closed. But a great many of those that are currently operating still have local restrictions and limited opening hours.
Currently, 48 of the group’s 51 online markets are open.
The company also said it’s continuing to take action to mitigate the Covid-19 situation. “As the pandemic has speeded up the digital shift in the industry, the company’s transformation work relating to digitalisation, the supply chain and the organisation is being accelerated,” it explained.
CEO Helena Helmersson said: “Before the pandemic hit, we performed strongly – a result of many years of long-term investments to meet the digital shift in the industry. This, combined with the fact that we have acted quickly to counter the negative effects of Covid-19 and that we are speeding up the transformation of the H&M Group, makes me convinced that we will come out of the current crisis stronger.
“During the pandemic it became clear how important it is that the digital and physical channels interact to meet customers’ needs. When the majority of the stores were temporarily closed, we focused on redirecting product flow to our digital channels, which remained open at all times in nearly all our online markets. The positive development of online sales has continued since we began reopening our stores.”
She also said that while the firm’s pace of recovery varies greatly between markets, partly because local restrictions differ, it has so far been better than expected.
But the firm expects markdowns to be an ongoing issue. “Since there is an oversupply of spring products throughout the industry, and the market remains weakened, we expect markdowns in relation to sales to increase again in the third quarter. We are continuing to adjust costs to mitigate the negative impact of the Covid-19 situation."
Analysts think H&M needs to focus even more heavily on boosting its digital operations following their success during the lockdown.
Kate Ormrod, Lead Retail Analyst at GlobalData, said: ‘‘Shoppers have not reverted to their pre-Covid shopping behaviours, at least yet. Consumer reluctance to visit physical stores, with the in-store experience dented by social distancing measures, and fewer social occasions to encourage spending, are obstacles to overcome in H2.
“H&M’s value positioning is undoubtedly beneficial, as many shoppers are expected to trade down, but unique product and showcasing value for money will be key to entice purchases post-pandemic.
“In H&M’s mature markets, a large store estate was undesirable even before Covid-19, but especially unnecessary given the swift global shift to online in Q2. So, H&M is to further rein-in its bricks-and-mortar reach, with a net decrease of 40 branches [this year]. H&M is known for having been late to the party when it comes to embracing online, but following heavy investment in recent years, the value player will have been better able to protect itself during lockdown than some competitors – and, in the UK, likely benefited from Primark shoppers’ inability to buy online”.
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