H&M Karl-Johan Persson

STOCKHOLM — Hennes & Mauritz is betting that a combination of online and physical stores will get it back on track after a disappointing year that saw profits fall 13 percent.

The Swedish fast-fashion giant held its first Capital Markets Day here on Wednesday, at which officials including chief executive officer Karl-Johan Persson detailed measures the retailer is taking to address its recent failings.

The group said it expects online sales to grow 25 percent in 2018 and new stores to boost revenues by 4 percent, though it still forecasts a drop in like-for-like sales in physical stores — which account for the bulk of revenues — for the year as a whole.

“We believe that the first half will be weak, but that we’ll see a gradual improvement throughout the year,” Persson told analysts and reporters gathered at the Cirkus concert hall on the island of Djurgården. “We believe in online and physical stores combined.”

H&M said last month it does not expect to meet its growth target of increasing sales in local currencies by 10 percent to 15 percent in the current financial year, due to the struggles it faces in its stores.

The group’s main priority is to reverse the slowdown in comparable sales within its core H&M brand in the face of growing competition from online pure players such as Amazon and Alibaba.

The company was forced to offer more discounts in the fourth quarter due to decreased traffic in stores and mistakes in its assortment. As a result, stock-in-trade stood at 16.9 percent of net sales in 2017, above the group’s preferred range of 12 percent to 14 percent.

The brand is testing new concepts that it expects to scale up in 2019, including more welcoming store interiors, tighter product assortments, personalized services and faster delivery for online purchases.

“We need to take a big step in terms of making sure that the store experience is more inspiring, that it’s more convenient and that it is more relevant,” Persson told the meeting.

The group plans to increase its use of advanced analytics and artificial intelligence to detect trends, manage prices and allocate stock, as well as boosting the efficiency of its supply chain and fulfillment platforms.

H&M intends to open four highly automated warehouses, allowing it to offer next-day delivery of its full assortment to 90 percent of the European population within a year from now.

As its transition work takes effect, physical stores are expected to return to comparable positive sales development from 2019 onward, though Persson would not commit to a more precise time frame.

As a result, shares in H&M closed down 4.6 percent at 135 kronor, or $17.55 at current exchange, on the Stockholm Stock Exchange. The stock has tumbled around 45 percent in the last 12 months.

This year, the group plans to open around 390 stores and close some 170 underperforming locations. Nonetheless, chief financial officer Jyrki Tervonen said opening stores is “a good business case” for the group, noting that the payback period was usually less than 17 months.

Company officials underlined that with 800 million transactions last year, H&M is in a strong position. But Persson admitted the brand has not been nimble enough in the face of a rapidly changing retail landscape.

“We are roughly at the same level as we were a couple of years back when it comes to fashion, quality, prices and sustainability. And although we are at a good level, it’s not enough, so a big focus will be to improve these areas,” he said.

“We didn’t cater well enough for the core customers at the H&M brand,” the executive added, noting the retailer failed to offer an optimal mix in terms of price range and fashionability.

He was more upbeat about the e-commerce business, which covered 43 markets in 2017, with four more to be added this year. Providing data on the segment for the first time, H&M said e-commerce is “growing well” and represented 12.5 percent of total revenues last year, but accounted for 22 percent of operating profit.

The company forecast online sales will increase by around 20 percent a year in the next five years to total 75 billion Swedish kronor, or $9.3 billion at current exchange rates, by 2022. Digital investments represent 45 percent of the group’s total capital expenditures.

New business — which encompasses brands such as COS, Cheap Monday, Monki, & Other Stories and Arket — accounted for 7 percent of total sales last year.

Sales for this division are expected to increase by at least 25 percent a year to reach more than 50 billion Swedish kronor in 2022. During this period, the group expects revenues at COS to grow by at least 100 percent, Weekday by at least 300 percent and & Other Stories by at least 250 percent.

H&M is also opening up to external brands for the first time. As reported, later this year it will launch Afound, an off-price marketplace offering products from well-known and popular fashion and lifestyle brands, both external and from the H&M group.

H&M and H&M Home will open on the Chinese e-commerce platform Tmall. Meanwhile, Persson said that H&M has set up an investment arm called Co:Lab.

“We are looking to invest in companies in specific areas with a strategic fit to our group where we feel that we can help these companies to develop, and where we can develop as a group as well, and obviously we’re aiming to generate good financial returns,” he said.

In addition, he teased two new initiatives.

“One team [is] working to extend collaborations with external brands and companies, not only for the off-price market, but for the full-price market as well. We will tell you more about this later during the year,” Persson said.

“A second team is working to leverage some of the group assets that we have, and in doing that, to offer services to other brands and companies, and we see a big demand for this,” he added, without providing details.