Tough Q4 dents H&M, will new brand Afound and China Tmall deal help its turnaround?

By

Sandra Halliday

Published
Jan 31, 2018

H&M may have seen some disappointing results of late but the company was at pains to emphasise that it “continued to grow globally in 2017” as it released its full-year results on Wednesday.

Yet the results didn’t make happy reading, especially as the last quarter of the year was weak with the huge H&M chain struggling and resorting to heavy discounts. The fashion retail giant stayed upbeat though and even announced a new brand, to be called Afound.  

Afound will be "an off-price marketplace offering products from well-known and popular fashion and lifestyle brands, both external brands and those from the H&M group.” Unusually, it will be launched in Sweden, with a first store in Stockholm and a local website. That’s a variation from the group’s long-standing tradition of opening new brands first on London’s Regent Street.

TOUGH 2017

Looking back rather than forward, what actually happened last year? Sales including VAT rose 4% to SEK231.771 billion (€26 billion) in the 12 months to November 30. And they increased by 3% in local currencies, while gross profit rose to SEK108.09 billion from SEK106.177 billion. 

But there were falls too. The gross margin of 54% was down from 55.2% and net profit fell to SEK16.184 billion from SEK18.636 billion.

So clearly the company wasn’t where it would have liked to be, especially as the increased sales were achieved via extra store space as it operated 388 more stores by year-end. 

Where there any signs of a turnaround? No, quite the opposite. Q4 was such a hard period for so many (but not all) of H&M’s retail peers and the Swedish firm wasn’t exempt.

From September to November, sales including VAT fell 4% in local currencies to SEK58.481 billion, or 2% currency-neutral. Considering all those extra stores, that was bad news.

Q4 gross profit fell to SEK27.929 billion from just over SEK30 billion with the gross margin down to 55.4% from 57%. Post-tax profit dropped more sharply to SEK3.993 billion from SEK5.914 billion.

CEO Karl-Johan Persson said Q4 was characterised by difficulties at the H&M chain “where the changes in customer behaviour are being felt most strongly and footfall has reduced with more sales online.” And it seems there were some fashion missteps too as the CEO referred to “some imbalances in certain aspects of the H&M brand’s assortment and composition.”

The company said the “weak sales development within the H&M brand’s physical stores led to increased markdowns and handling costs which had a negative impact on the result in the quarter.”

ANY GOOD NEWS?

At least the company is more upbeat for the current quarter and expects sales in local currencies to rise 1%. It’s also rolling out its H&M e-store to another four markets this year with India, Saudi Arabia, UAE and Kuwait set to boost sales further. It will open H&M and H&M Home on China’s mega-sized Tmall this March too, exposing it to a huge marketplace. 

Meanwhile it will continue to open stores, with new markets to include Uruguay and the Ukraine. And there’s that Afound debut to take into account as well.

CEO Karl-Johan Persson said of all this that “the fashion industry is changing fast. At the heart of the transformation is digitalisation and it is driving the need to transform and re-think faster and faster.” He said the firm is “well-placed to adjust to the new dynamics and take advantage of the opportunities in front of us.”

He thinks that way because, while the group is a big name, its market share is still relatively small in a market that’s growing.

But what about fixing what went wrong last year? Persson believes “we need to accelerate the transformation even more.” To do this, the company is taking three main actions. That means fixing its core offer with a focus on product, value and sustainability, inspiring and convenient stores, best-ever e-stores, and a seamless omnichannel experience.

It also intends to focus on tech as that can boost supply chain efficiency, give it insights through analytics and intelligence, and offer “huge potential across the board from assortment planning to supply chain and sales”.

And it will carry on launching “new brands for new needs and new segments”. It currently has “eight brands that are all scalable,” with Afound to be its ninth.

Will it all be enough? Only time will tell.