PARIS — Is fast fashion losing steam?

This story first appeared in the January 28, 2004 issue of WWD. Subscribe Today.

Last year, Europe’s cheap-chic purveyors had a tough go as they were hit by a weak retail environment, cost pressure from the slumping dollar and an unusually warm summer in their core European markets. Looking ahead, retail analysts project more short-term pain due to currency fluctuations and heightened competition with mass retailers.

Indeed, some suggest fast fashion might need to slow down.

Sweden’s Hennes & Mauritz, which reports its full-year profits and sales on Thursday, in November disappointed with a weaker-than-expected 4 percent sales gain. Analysts said this actually translated into a 6 to 7 percent decline in same-store sales at the 900-unit chain.

Inditex, the Spanish retailer with 1,924 stores, including 600 Zara units, last month reported a 10 percent drop in third-quarter net profit and signaled a likely decline in fourth-quarter like-for-like sales and gross margins due to strong discounting in its key markets.

Meanwhile, other players lost ground. Fast-fashion chains in France, such as Morgan and Etam, slumped in the three months from July to September for the first time in more than 10 years, according to François Forget, director of retail research firm Conseil National des Succursalistes de l’Habillement. Fast-fashion sales in France are estimated to have dropped about 1 percent last year.

This comes after several years of robust growth in the sector, especially from Zara and H&M, both of which seemed unstoppable juggernauts, briskly opening stores and expanding into new markets.

Now, however, analysts wonder if it is not time to scale back their aggressive expansion. H&M opened about 110 stores in 2003. Inditex, which also operates the Pull & Bear, Massimo Dutti, Kiddy’s Class and Stradivarius chains, opened 380 new stores last year, compared with a previous target of about 360. It also has started the rollout of the new Zara Home decoration stores.

“We question the wisdom of Inditex opening even more stores with weak like-for-like sales and uncompetitive prices,” said Lehman Brothers retail analyst Fraser Ramzan.

“The expansion has piled up cost pressure,” said Keith Wills, retail analyst at Goldman Sachs. “Inditex needs 6 percent like-for-like growth [to break even], which seems difficult. As a group, they’re expanding at 17 to 18 percent a year. I’d prefer to see a 10 to 11 percent new-store rate.”

H&M is dogged by soft consumer spending in its core German and Swedish markets, which account for over 40 percent of sales.

“H&M also faces the issue of U.S. expansion,” said Wills. “I predict that it will do well ultimately in the U.S., [where it operates some 60 stores and has yet to turn a profit]. But they have to perform in the malls. Already they’ve indicated that they’ve reduced the amount of more extreme fashions at mall stores and they seem to be on the right track. H&M’s growth in Europe is more mature. Zara, especially in Northern Europe, still has quality growth-expansion cities.”

Analysts agreed both chains face good long-term growth prospects, especially as they move into new, fragmented markets such as Italy and Eastern Europe.

But the short-term looks tough. Prices have fallen — and will probably fall further — as Europe’s common currency, the euro, soars in value against the dollar. H&M, which sources the majority of its apparel in Asia, has cut prices since most of these transactions are conducted in dollars. This has resulted in lower average prices in its stores — and lower general sales figures, as H&M lowers prices to keep pace with the competition.

Though Inditex sources about 80 percent of its products in Europe, mostly in its own factories in Spain, it has had to cut prices to compete, eating into its profit margins. Over the next year, Inditex said it would try to negotiate lower prices from suppliers and to increase slightly production in China and Eastern Europe. Analysts said price deflation would not be as pronounced in 2004, even if it remains an issue.

“The average unit price at Zara has gone down considerably,” said Robert Miller, director of European retail research at Dresdner Kleinwort Wasserstein. “They have felt competitive pressure in Europe.”

In December, Inditex said unit sales in the period from August to November increased about 26 percent, twice the rate of sales growth in constant currencies, but that the average selling price dropped 10 percent because of changes in the fashion mix, rather than “discounting activity or changes in the price architecture.”

Weather also played a major role in the companies’ recent difficulties. Temperatures in Europe were unseasonably high well into last fall and even winter. This meant that cheaper T-shirts were selling rather than more expensive coats and sweaters.

Wills at Goldman Sachs added that the lack of a “great fashion look” should also be factored in, pointing to disappointing women’s wear sales across the Continent.

H&M and Zara depend on strong runway trends, which they reinterpret and recycle, sometimes within weeks, to generate sales. But fall’s multiple fashion stories, from Mod to bohemian to punk, didn’t provide the retailers with one overriding trend to exploit.

H&M’s principle trends for last fall ranged from the Thirties and hippie chic to London Eighties glam. Spring remains retro, but is more focused, with an emphasis on the late Fifties and early Sixties looks.

Others contend that the dearth of unifying trends explains only half the story, saying that fashion items account for only 15 percent of H&M’s product pyramid, with basic items accounting for the majority of its sales. At Zara, the story is similar, although analysts said the most fashionable items account for a slightly greater percentage of the mix.