Dive Brief:

• H&M shares Thursday plummeted as much as 6.6%, a four-year low, after the company’s CFO, Jyrki Tervonen, told analysts that bloated inventory could precipitate heavy discounting and hit margins, Bloomberg reports.

• The Swedish fast-fashion retailer also reported first quarter results that missed its expectations. Q1 net sales rose 7% to 46.9 billion kronor, though Q1 net profit fell to 2.46 billion kronor ($278 million) from 2.54 billion kronor a year earlier, on higher discounting and slower sales, according to an H&M press release.

• The company also announced the launch of a new brand, Arket, in early autumn 2017. Arket will offer a “broad yet selected range” of apparel for men, women and children, as well as a smaller, curated assortment for the home, priced slightly higher than H&M, according to a press release. Some Arket stores will include cafes. The first store will open in London and online in 18 European markets this fall, then in Brussels, Copenhagen and Munich. The company also said it will open stand-alone H&M Home stores next year.

Dive Insight:

After disrupting the apparel market with low-priced yet on-trend apparel, H&M is running into its own problems with changing consumer behavior. After previously insisting that its store-focused approach was working, the fast-fashion retailer appears to be coming to terms with the rise of e-commerce.

“Retail is going through a challenging period of change in which customers’ shopping behaviour and expectations are changing at a fast pace as a result of growing digitalisation,” CEO Karl-Johan Persson said in a statement. “This is an accelerating development which also brings great opportunities.”

H&M’s inventory problems are somewhat surprising, considering fast fashion’s reputation for swift manufacturing and supply chain management. Rival Zara, which innovated the approach decades ago and continues to master it, runs most of its own factories and controls most of the supply chain. This helps Zara order up small batches of inventory on the fly and get them into stores in record time. That approach helps it adjust more quickly to phenomena like unseasonable weather. In its most recent quarter, Zara owner Inditex​ handily beat forecasts and announced the opening of several new stores. 

Persson on Thursday indicated that H&M needs significant improvement in its supply chain and aims to revamp its operations to include greater use of analytics and more investment in e-commerce. “To meet the rapid change that is going on in fashion retail we need to be even faster and more flexible in our work processes, for example as regards buying and allocation of our assortment. We are therefore investing significantly in our supply chain, such as in new logistics solutions with greater levels of automation, but also in optimising our lead times,” he said. “[W]e are continuing with our omni-channel strategy, i.e. the integration of our stores with online sales in order to give customers a more seamless shopping experience.”

The company is also working to improve many of its stores, including a “new and upgraded version” of its flagship H&M stores, he said. In addition to H&M, H&M Home and soon Arket, the company runs the COS, & Other Stories, Monki and Weekday brands. Those “continued to develop very well,” Persson said.