PARIS – Despite economic headwinds for retailers in many key markets, Europe’s fast-fashion giants Inditex and H&M should see solid performance during the holiday spending season, according to financial analysts, retail consultants and trend forecasters.
“The high street is tough at the moment in the U.K. and Europe. But we see H&M working well and hard for their target customer, while Zara has kept its cutting edge on fashion and driven hard with Zara Home,” said Paul Thomas, a senior consultant at Retail Remedy, noting that those geographies represent more 62 percent of sales for Zara-owner Inditex and 71 percent of sales for H&M.
Unseasonably warm temperatures in Europe dealt a blow to retailers in early autumn, as many consumers delayed purchases of warm-weather clothing. H&M saw growth in sales slow to 1 percent in September, versus 10 percent in July and 7 percent in August. But a cold snap in the U.K. and across much of the continent in November and early December could help the retailers catch up on sales.
“It’s been lovely and clear but very cold, which is perfect for retailers to get people to come out shopping,” said Thomas. “The key now is whether stores held their nerve and didn’t put all their winter goods on sale, and we haven’t seen a huge amount of early discounting from either [Zara or H&M].”
H&M reported last month that sales had already rebounded in October, coming in slightly above analyst expectations at plus 10 percent year-on-year.
Shifting tastes, a crowded market, and slow growth in real incomes in developed markets have combined to create a difficult climate for retailers, but a strong offer and competitive pricing should continue to favor Inditex and H&M — the world’s two largest clothing retailers — as shoppers choose their holiday gifts and wardrobe.
“It’s difficult when economic growth is weak, and other expenditures such as on housing and cell phones have really increased,” said Gildas Minvielle, director of the Economic Observatory at the Institut Français de la Mode. “Retailers have to be really competitive both on price and on renewing their offer.”
Disruptions in the political sphere, like the resignation of Italian Prime Minister Matteo Renzi, may cause some households to rein in spending, but this could have a potential upside for fast-fashion operators.
Faced with political disturbances, “people will become more cautious with their spending, and this could push them down the value chain when they are making purchases,” said Raj Badiani, a senior economist at IHS Global Insight.
“There is more and more demand for desirable, chic products at the lowest price,” concurred Laurent Le Mouel, creative director at the NellyRodi trend agency in Paris. “Certain items like sneakers or cult brands like Supreme are really attractive for young people, but in general clothing is no longer the number-one attraction.”
According to Le Mouel, Inditex — through its primary brand Zara — appears to be particularly well-positioned to respond to shopping trends this holiday season: lots of velvet, asymmetrical cuts, glittery and sequined backless dresses, and silver puffy coats. “It’s the good products with the right style at the right time.”
Half of Inditex merchandise is produced in its key European market. Local sourcing and a rapid speed-to-market should continue to favor Inditex over competing operators by reducing risks related to weather, fashion and currency.
“Inditex says they go into a season only 40 percent committed” — meaning the company would have sourced less than half of the merchandise it expects to sell before a season begins, said Julian Easthope of Barclays Equity Research. The strategy helps shield the company from overproduction and markdowns. “H&M goes into a season far more committed, which leaves them rather exposed in times of too hot or too cold.”
The faster speed-to-market can also give Inditex more flexibility on pricing. “Inditex can get a new product to shelves in 3 to 6 weeks,” said Thomas Gadsby, a retail analyst at the investment banking and research firm Liberum. “They can price higher because they are selling items that they know people want to buy now.”
H&M has positioned itself more as a value retailer, Gadsby said, and is having to compete more and more against emerging competitors like Asos and Primark. Narrowing margins have become of increasing concern for the H&M group — whose secondary brands include Cheap Monday, & Other Stories, and Cos.
“The group has put through price cuts or raised the quality at similar price levels since 2010 to retain its competitive position,” an initiative that coincided with a cost-raising push for sustainability, rising cotton prices, and the collapse of the euro versus the U.S. dollar, according to a report published by Barclays’ Easthope last month. Eighty percent of H&M’s products are sourced from Asian factories, with contracts fixed in U.S. dollars.
Earnings before tax and interest were down 17 percent at H&M group during the first nine months of the year, the company reported on Sept. 30, as narrowing margins coincided with investment in new stores.
Easthope has maintained a hold rating for shares in the H&M group, however, saying that “[H&M] has an excellent long-term track record with 13 percent revenue growth and 13 percent EBIT growth over the last 18 years.” He said the company can expect to see sales grow 7 percent in the fourth quarter.
Inditex should expect to see organic growth at 17 percent in the fourth quarter, according to Easthope. Margins for 2016 are projected at 17.6 percent profit on sales of 23.7 billion euros, or $25.1 billion.
Growth at Inditex will driven by same-store sales, while H&M will rely on new locations, since its existing outlets have matured faster due to higher ad spending, Easthope says.
Inditex and H&M report results for the third quarter this week, on Dec. 14 and 15 respectively. H&M will also publish sales data for the month of November at the same time as its quarterly results.