PARIS — Hard-pressed to reverse a string of missteps, Hennes & Mauritz AB unveiled plans for a new discount marketplace as it outlined its strategy to catch up with nimbler fast-fashion peers.
But in a sign the Swedish retailer faces an uphill battle, investors sent shares to their lowest level in a decade, falling 10 percent to close at 139.34 kronor.
The company on Wednesday reported a 13 percent dip in full-year profit, figures that highlighted its struggle adapting to a rapid shift toward digital consumption. Adding to its challenges, executives acknowledged missteps in offering the right product assortment in recent months, and said they don’t expect an improvement in sales and profit until the second half of 2018.
H&M also finds itself challenged by other industry players doing a better job producing and delivering fashionable clothing at breakneck speed.
“While H&M was once a pioneer, it now looks like the company has failed to keep up,” said Pedro Aguilar, senior beauty and fashion analyst at Euromonitor International. The analyst noted the company’s reliance on production in Asia means it has longer average lead times than rival Inditex, which produces in its home market of Spain and nearby countries. Meanwhile, he added, online fast-fashion players such as Asos and Boohoo have also reduced lead times, “almost pushing out new items at a continuous pace.”
“We think H&M has been somewhat stuck in the middle, between value fashion retailers like Primark and retailers either running disruptive margins [like] Asos or Zalando or retailers with more margin for error who have been better able to absorb the costs of online development,” like Inditex-owned Zara, analysts at RBC Capital Markets said in a research note.
Addressing these issues, executives at H&M said they plan to work on speeding up its supply chain and revisiting its production capacity.
“We’re investing a lot in the supply chain to become even faster, more flexible, more responsive; we’re looking into our production capacity and production set up; we’re mapping out and making investment in the whole logistic network to have more optimal garment flow,” H&M chief executive officer Karl-Johan Persson told a conference call.
Profit for the year ending Nov. 30 came to 16.18 billion kronor, or $2.05 billion, H&M said, noting a rise in online business has caused a decline in store traffic.
“Underneath the disappointing recent performance, we see reasons for optimism…but we need to accelerate the transformation,” noted the company, which plans to elaborate on its strategy at an investor day on Feb. 14.
In a bid to respond to changing shopping habits, the retailer’s new discount marketplace for fashion and lifestyle products will feature both external and H&M group brands. Named Afound, it will carry a mix of items from current seasons, past seasons, and even vintage pieces in a variety of price segments, both online and in physical stores. It will debut this year with a first unit in Stockholm.
“The main idea is to bring something new to the off-price market, it’s a huge market, a market that’s growing,” Persson said. “To do that well we have to bring something new…a well-curated assortment of carefully selected products from a lot of brands, a lot of external brands from different price segments, a lot of well-known brands but also our own brands.”
The executive touted the concept of offering stylish products at fantastic deals but cautioned the project was in early stages: “We’ll start in Sweden and see how it goes.”
Sales for the year rose 4 percent, including VAT, to 232 billion kronor, a tally that the company said was below expectations.
Fourth-quarter sales were down 2 percent in local currencies, to 50.41 kronor, with the company blaming “imbalances” in the product assortment for weakening results.
Calling the quarterly performance “poor but well flagged,” analysts at Raymond James said they thought recent sales declines are prompting welcome change in the business model.
“We have consistently stressed the disconnect between performance at existing stores and management’s aggressive network expansion strategy,” noted the analysts, who said they were encouraged to hear that management signaled plans to optimize its network — closing some stores and opening fewer new ones.
H&M said that as it works to improve its store network, the pace of expansion would likely slow down, with new stores likely occupying smaller spaces. The company opened 479 stores in its fiscal year 2017 and closed 91.
As consumption shifts online, H&M is also revisiting the format of its stores and testing new ideas.
“With online sales growing, it’s becoming easier to buy online — the stores need to offer something more and more of a great experience, not only as a place for buying garments, maybe offering other things as well, and also packaged in a nicer interior, easier to shop and easier to return and maybe other services as well,” Persson said. “We’re looking into a wide range of things.”
On the digital front, H&M plans to improve its digital shopping experience, including site navigation, payment options and faster delivery, executives said. Integrating physical and digital stores will include services like click and collect, online returns in stores and mobile payments. As it invests more in new technologies, H&M said it would look into artificial intelligence to help out with assortment planning and improving the supply chain.
The company plans to bring H&M and H&M Home labels to Alibaba’s online e-commerce platform Tmall in March 2018.
In addition to its financial challenges, H&M last month ignited a social media storm with a photo of a black child modeling a green hoodie with the slogan “coolest monkey in the jungle.” H&M apologized for the “poorly judged product and image” as collaborators The Weeknd and G-Eazy cut ties with the brand. The company also closed stores in South Africa after protesters ransacked some locations.