In its latest financial update, H&M Monday noted March business is taking a hit mostly in Europe — its most important market — as it reported an 8 percent rise in first-quarter sales, a period that felt the brunt of COVID-19 in China.
“The situation in every country is changing rapidly,” said the Swedish fast-fashion retailer, listing more than a dozen European countries where retail outlets have closed. Last year, the continent accounted for nearly half of H&M’s sales, where it counts more than 3,000 stores, compared to less than 2,000 elsewhere in the world.
Primark parent Associated British Foods, meanwhile, said stores accounting for 20 percent of selling space are now shut, in accordance with the latest instructions from local governments, which will deliver a blow to sales in the second half of the year.
ABF said the shuttered stores — in countries including Italy, France, Austria and Spain — currently generate 30 percent of Primark’s sales.
H&M — which been undergoing a broad overhaul that includes beefing up technology investments, expanding digital commerce into new markets, while updating logistics systems and store formats — noted this work continues but stressed that wider action to contend with disruption from the spread of COVID-19 is necessary.
“While the H&M group’s transformation work continues at full speed, all activities in the company are now being carefully evaluated — including from a cost and risk perspective — so as to be able to mitigate the negative effects associated with the virus as far as possible,” the retailer said.
For the first quarter ending Feb. 29, sales totaled 54.95 billion Swedish kronor, or $16.09 billion, up 5 percent at constant currencies, weighed down by a 24 percent decline in business in China over the period.
At the height of the COVID-19 crisis in China in February, the group shut 334 out of its network of 518 stores in the country. Excluding a good part of Asia, group sales were up 7 percent in local currencies over the quarter.
The company said sales in China are gradually recovering as the situation improves.
While the COVID-19 impact will be severe, the group will likely emerge stronger, said RBC Europe in a research note.
“H&M is likely to come out of any downturn as one of the winners,” said Richard Chamberlain of RBC, noting that underlying business indicates “execution back on track.”
Berenberg noted the disruption will likely weigh on profitability.
“While online remains open for orders, given the lockdowns across many markets, demand for clothing is likely to reduce and the shift in mix between channels will be a significant headwind to profitability,” RBC said in a research note to clients.
As the spread of COVID-19 marches across Europe, H&M has temporarily closed stores in Poland, Spain, the Czech Republic, Bulgaria, Belgium, France, Austria, Luxembourg, Bosnia-Herzegovina, Slovenia and Kazakhstan, and partly in Greece.
Full financial results for the quarter will be reported on April 3.
Joining corporate gestures aimed at combatting the virus, H&M pledged to donate $500,000 to the United Nations’ COVID-19 Solidarity Response Fund, which supports the World Health Organization’s efforts. Tech giants Google and Facebook also contributed to the fund.
Primark owner ABF said that in the first six months of fiscal 2019-20, which ended in early March, adjusted operating profit will be ahead of its previous expectations, mainly due to higher margins for Primark and the grocery business.
As a result, the company said adjusted earnings per share for the first half will now be ahead of last year on both a lease-adjusted and a reported basis.
The company also said that due to the improving public health situation in China, which has already seen its cases of COVID-19 peak, most factories supplying Primark have reopened.
“As a result, supply shortages from that country are now expected to be minimal,” the company said.
ABF added that it had not seen a material impact on its sugar, grocery, ingredients and agriculture businesses. The latter should come as no surprise as supermarket shelves across the U.S. and Europe are being picked clean by panicky shoppers.
The story is a different one for fashion and accessories: The spread of the virus across Europe has meant that stores accounting for 20 percent of Primark’s selling space are now closed until the respective governments permit them to reopen.
“From the date of this announcement, we had expected sales of 190 million pounds from these stores over the next four weeks. The remainder of the estate, including the U.K., which represents 41 percent of sales, has seen like-for-like sales declines over the last two weeks and these have accelerated over the past few days as a result of reduced footfall,” the company said.
ABF said while it was managing the business “appropriately,” it does not expect to “significantly mitigate” the effect of the contribution lost from these sales.
The situation will most likely deteriorate even further: In a research note on Monday morning, Bernstein said it expects to see partial closures in the U.K., and in the remainder of the markets, including Germany and the U.S.
“This will impact not only [like-for-like sales], but also margin, with massive operating deleverage on the fixed cost base. With no online presence, we do not expect any recovery of these lost sales within the half,” Bernstein said.
Given the effect of COVID-19 on Primark’s sales, the company said, it is too early to provide earnings guidance for the remainder of the current financial year.
“The group has a strong balance sheet, substantial cash liquidity with some 800 million pounds of net cash at the half-year and significant undrawn bank facilities,” said ABF, adding that the group will provide a further update with interim results on April 21.