Dive Brief:

• With about a quarter of its leases up for renegotiation or exit annually, H&M on Thursday said it plans a net decrease in its brick-and-mortar footprint next year of about 250 stores, according to a company press release.

• The fast-fashion apparel retailer also said that third quarter net sales fell 16% to 50.9 billion Swedish krona ($5.7 billion), as the pandemic kept hundreds of stores shut throughout the quarter. 

• The company swung back to black from the previous quarter, with adjusted profit of SEK 2.37 billion. Gross profit reached SEK 24.9 billion and gross margin reached 48.9%.

Dive Insight:

Last year, H&M had already begun to pull back from its previous plan to expand its global footprint and instead pivot to strengthen its digital operations.

Even so, its brick-and-mortar strategy for next year represents a significant departure for the fast-fashion retailer. In June, for example, the company said it would close 170 stores this year, but with openings that's just a net 40-store decrease.

The retailer had for years insisted that its physical locations were its core strength, and as a result is somewhat late to its digital revamp. That may have hurt now that stores have been closed down by the pandemic. On Wednesday, H&M said that 900 of its 5,000-plus stores remained temporarily closed early in the quarter due to the pandemic, with more than 200 still closed at the end of the quarter.

While its sales trajectory has been positive since its "terrible" second quarter when sales fell 50%, "H&M's online channel has not picked up the slack of store closures to the extent that it has at many of its multichannel competitors," according to Sofie Willmott, content head of apparel at GlobalData.

In fact, its third-quarter e-commerce performance didn't change much year over year, despite all the temporarily closed stores, and didn't keep pace with rivals like Zara owner Inditex, according to a GlobalData client note Thursday.

While 250 closures may seem significant, GlobalData said it may not be enough given that 250 stores represents just 6% of its locations. "[C]onsidering that apparel online penetration is set to remain high, at between 30-40% in key markets including the UK and US, H&M should make more significant changes," Willmott said.

The retailer has plenty of strengths, including its pricing and efforts in sustainability, which helped keep September's sales decline to just 5%, but they must be better positioned online, per GlobalData.

"Both its value appeal and environmentally-friendly reputation, boosted by new initiatives such as the launch of the COS resale platform, sets H&M apart from its competitors but it must enhance its online proposition given the importance of digital channels, to succeed in a very tough market," Willmott said.