PARIS — Hennes & Mauritz AB said its profit plummeted 44 percent in the first quarter, weighed down by discounts and slow sales, illustrating the uphill battle it faces to turn around the ailing business.
The fast-fashion retailer, which has faced criticism for being slow to recognize the need to change strategy to catch up with nimbler rivals, including online, said the start of its transition year had been tough.
Profit for the period ending Feb. 28 fell to 1.37 billion Swedish kronor, or $170 million, from 2.46 billion kronor in the same period a year ago, marking one of the weakest periods since it started reporting quarterly figures in the Nineties, according to company officials.
Shares sank to their lowest point in a decade, down 6.1 percent to 119.58 Swedish kronor in afternoon trading, weighed down by investor concern that lingering stocks of unsold clothing may be difficult to unload, prompting the need for further discounts.
H&M began to accumulate inventory because of weak fall sales, a problem compounded by an exceptionally cold February. In a conference call with analysts, executives said the issue would spill over into the second quarter, making further price cuts necessary beyond the traditional first-quarter sales period. They said that cold weather again in March has further delayed the start of the spring retail season.
Analysts focused on the high stock levels as a potential source of difficulty in the coming months, and possibly even further into the future.
“H&M continues to be aggressive in clearing stock, particularly online, and we think there is a risk that constant promotions are losing their power to drive sales and also question whether the main H&M brand will be tarnished going forward,” Richard Chamberlain, analyst with RBC Capital Markets, said in a research note.
The analyst lowered RBC’s target price on the shares to 110 kronor from 115 kronor, and said that the company’s profit guidance looked optimistic.
H&M said it targets “a somewhat better result for full-year 2018 compared with the previous year” for the group and projects sales online and from new businesses will grow by more than 25 percent this year.
The Swedish retailer is undergoing a broader overhaul, shifting resources away from its traditional source of growth — store expansion — to invest in bolstering its digital expertise, revamping store models and improving its supply chain. Still, some analysts expressed concern about the size of the task.
“We are not convinced that management is doing enough to address the fundamental issues with the H&M brand,” Chamberlain said.
“The weak sales development combined with substantial markdowns had a significant negative impact on results in the first quarter,” said Karl-Johan Persson, chief executive officer, noting that cold weather had adversely affected sales of spring clothing.
Still, Persson sought to strike a positive note, saying that H&M’s efforts to change the business are “giving good indications and results” even if they haven’t reached enough scale to have a broader effect on business.
Tests of new ideas to improve store experiences are going well, executives said, noting they plan to implement new formats in the latter part of 2019.
H&M, which has been struggling to catch up in the digital sphere, said that its new online store in India, launched in mid March, is off to a good start and that the launch of the H&M and H&M Home brands on T-Mall in China, also this month, had exceeded expectations.
The retailer said it has improved its online platform, with higher speed, better navigation and extended payment options.
Technology is the backbone of the Swedish retailer’s strategy, executives said, noting they seek to offer easier shopping options including click and collect, scan and buy and online return in stores. The group plans to roll out radio frequency identification, or RFID technology which tracks clothing, in around 1,800 stores this year after successful pilots, H&M also said.
The company is “comparatively handicapped by its later rollout of RFID which is central to a powerful click and collect organization,” said analysts at Raymond James earlier this month, noting that competitor Zara, which belongs to Inditex, was equipped with the technology as early as 2016.
H&M has been investing in three new automated logistics centers in the Netherlands, Sweden and Poland, which will cut down on delivery times.
While the H&M brand remains a priority for the company, it plans to launch a new discount retailer, Afound, this year in Sweden. The group’s ninth brand, it will sell both its own label and other brands.
Company sales for the period were down 1.7 percent to 46.18 billion kronor, due to cold weather and discounts.