H&M Hennes & Mauritz

PARISHennes & Mauritz continues to struggle to pull out of its defensive mode, missing expectations with a 21 percent drop in second-quarter profit and reporting it accumulated stocks of clothing over the period.

The Swedish fast-fashion retailer is undergoing a broad overhaul in a bid to catch up with nimbler rivals, investing in supply chains and artificial intelligence, as well as bolstering the online services. The earnings report prompted concern about progress of the turnaround efforts.

“We went into the second quarter carrying too much stock, and we still had some imbalances in the H&M assortment — something that we are gradually correcting,” said chief executive officer Karl-Johan Persson.

Profit for the March-May period totaled 4.638 billion Swedish kronor, or $520 million, slightly below expectations as markdowns continued to weigh on company earnings. In addition, the company flagged disruptions to the supply chain as it moved to modernize its systems and improve delivery times.

Sales for the quarter amounted to 60.46 billion Swedish kronor, or $6.9 billion, flat in terms of local currencies compared to the same quarter last year.

Disruptions affected sales in the U.S., France, Italy and Belgium, as well as online services in Nordic countries, H&M said.

Analysts expressed disappointment at the earnings report.

“The miss, although small, is particularly disappointing given already low expectations,” noted Barclays in an e-mailed note to clients.

Mounting inventory levels have been a source of concern for the company in recent months, and analysts flagged an increase in the proportion of inventory compared to sales.

“Inventory continues to grow in absolute terms [up 13 percent in local currencies] and as a proportion of sales,” noted UBS in a research note, adding the figure stood at 18.2 percent compared to 16.1 percent for the same period last year.

“These are historic highs for the company, and we think they are a reflection of a structurally challenged supply chain which will take time to improve,” the Barclays note said.

In a conference call with analysts, executives moved to reassure investors that they can draw down the stocks.

“We have not sold according to plan. We will clear this during summer sales as good as we can in our own channel and we will look at third parties as well,” Persson said in the call. He added that H&M’s goal is to improve the situation by the end of the season compared to same period last year, noting that many of the products were “seasonless.”

“It’s a balancing act of doing it most efficiently,” Persson also said, while declining to further detail the company’s plans.

H&M also flagged disruptions in the supply chain as it struggles to speed up its process, which affected group sales over the quarter to the tune of around two percent of group sales over the quarter, executives said.

“As part of our transformation work we are transitioning our logistics systems to make our supply chain even faster, more flexible and more efficient. These transitions are complicated and can result in temporary interruptions, as unfortunately occurred during the second quarter in some of our major sales markets,” Persson said. The executive added that technical glitches had arisen when integrating the warehouse management and automation systems, but that the issue had been largely fixed, paving the way for an easier transition for future markets. Eight countries have been shifted to the new system.

H&M is also exploring new ways to improve its stores and has launched a new discounter retailer selling other brands. In recent weeks, the group opened two Afound stores, selling fashion and lifestyle products at bargain prices from hundreds of brands.

“Reception has been very good so far,” said Persson, noting the company has plans to open more of the stores in Sweden this year.

The group also plans to bulk up the offer of H&M Home, extending the product range beyond textiles, decorations and products for kids to include furniture.