Analysis Paper

H&M Needs to Do More to Keep Business From Fraying Wilmot, Stephen . Wall Street Journal , Eastern edition; New York, N.Y. [New York, N.Y]24 Aug 2018: B.12.

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FULL TEXT [Financial Analysis and Commentary]

H&M needs a more radical restyling.

The world's second-largest fashion chain by sales has fallen behind as consumers have moved online. Despite a

big decline, the stock hasn't priced in the new reality.

For years, Hennes &Mauritz delivered metronomic profit growth by rolling out new stores, most of them under the

namesake H&M banner. Consumers loved its combination of low prices, high fashion and convenient locations.

About three years ago, however, the formula stopped working. The Swedish company was slow to react as

consumers -- and other retailers -- moved on.

One change was the rise of online fashion via companies such as Amazon.com's Zappos in the U.S. and Zalando

and ASOS in Europe. Another was the expansion of offline discounters like Primark, a European chain that now has

nine U.S. stores, the most recent of which opened in Brooklyn, New York, last month. Zara-owner Inditex, the

world's top clothing retailer, used a more flexible and rapid sourcing model to meet fashionistas' desires for

novelty in a way that H&M's design setup -- with most clothes ordered a season in advance -- couldn't. Compared

with more innovative peers, H&M no longer seems so chic, or convenient.

The company is now addressing these deficiencies, but too late and too timidly. The scale of the transformation

required is daunting. It will take time and money, with no guarantee of success.

H&M's stock has fallen more than 60% in the past three years as profits have plunged and the scale of the

company's problems has become clear. But it could fall still further. A valuation of more than 15 times 2018

earnings offers little compensation for the costs and risks of a turnaround operation. Analysts are penciling in

modest growth in profit next year, but the consensus forecast is predicated on an improvement in sales.

There was little evidence of the long-awaited improvement in the latest results. The company doesn't report like-

for-like sales growth, but UBS calculates this crucial figure was minus-4% for the quarter through May, only

marginally better than the recent trend. And inventories as a share of sales hit a new high in June, implying H&M's

summer offerings didn't resonate with consumers. The company will be aggressively clearing clothes in the

current quarter, hitting margins.

Chief Executive Karl-Johan Persson has started investing more aggressively in the logistics required to speed up

the supply chain and integrate online and store operations -- with mixed results so far. He has been less forceful in

shutting underperforming stores. He will close just 150 outlets this fiscal year out of a total approaching 5,000.

The recent sales trend suggests many more closures are necessary, while the remaining stores may need

refurbishment to bring back shoppers.

H&M has faced the costs of inaction, but not yet the costs of action. A turnaround is still uncertain and far off.

Credit: By Stephen Wilmot DETAILS

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Subject: Corporate profits; New store openings; Retail stores

Location: New York United States--US Europe

People: Persson, Karl-Johan

Company / organization: Name: Zappos.com Inc; NAICS: 448210, 454111; Name: Amazon.com Inc; NAICS:

334310, 454111, 518210; Name: UBS AG; NAICS: 522110, 523110, 523120, 523920,

523930; Name: Hennes &Mauritz AB; NAICS: 448110, 448120, 448140

Publication title: Wall Street Journal, Eastern edition; New York, N.Y.

Pages: B.12

Publication year: 2018

Publication date: Aug 24, 2018

column: Heard on the Street

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States, New York, N.Y.

Publication subject: Business And Economics--Banking And Finance

ISSN: 00999660

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 2092369656

Document URL: https://search.proquest.com/docview/2092369656?accountid=14270

Copyright: (c) 2018 Dow Jones &Company, Inc. Reproduced with permission of copyright owner.

Further reproduction or distribution is prohibited without permission.

Last updated: 2018-08-24

Database: ABI/INFORM Collection,US Newsstream

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