H&M warns disappointing sales could extend into Q4

Dive Brief:

Swedish fast-fashion retailer Hennes & Mauritz (H&M) reported disappointing third quarter results Friday, which it blamed on the strong dollar and increased discounts forced by hotter-than-expected weather.
H&M posted Q3 net profit of 4.82 billion Swedish kronor ($562 million), down 9% from 5.31 billion kronor in Q3 last year, missing FactSet analyst expectations of closer to 4.9 billion kronor. Sales increased 6% to 57 billion kronor, and were brisk in most markets until mid-August, when unseasonably hot weather hit; the retailer added that it may need to continue cutting prices in the weeks ahead, which will likely adversely affect Q4 results.
H&M says it’s continuing its rollout of more physical stores, with plans for a net addition of 425 new stores and three new markets for the 2015-16 financial year. In addition to Puerto Rico (which opened this June) and Cyprus (which opened in September), New Zealand will open its first H&M store in October.

Dive Insight:

Although H&M has been pointedly expanding its e-commerce reach after letting its digital efforts languish for years, CEO Karl-Johan Persson says that physical store expansion will also be key to sales growth and omnichannel capabilities.

That sentiment, along with the retailer’s merchandise expansion into beauty products and sportswear, concerns some analysts. Sales added by H&M's rapid expansion may be hiding falling store productivity, says Morgan Stanley analyst Geoff Ruddell. A massive and rapid expansion, for example, has hurt department store Macy's, which is now moving to shutter a significant number of stores.

"To be clear, we are not suggesting that profits will plunge this year," Ruddell wrote in a note to clients earlier this month, according to CNBC. But, he noted, declines could accelerate rapidly. "If current trends persist it is a matter of simple mathematics that profits [will] fall 40% by 2020 [and could] all but disappear by 2022," Ruddell said.

H&M’s results are in sharp contrast to Spanish rival Inditex, parent of fast-fashion powerhouse Zara, which last week posted profits and sales that beat expectations. H&M’s move to pull plus-size options in stores, a trend first spotted in New York by this month, could also be leaving money on the table while it chases categories that signal departures from its fast-fashion focus.

While H&M’s weather report could mean that climate change’s damaging effects could be extending to retail, analysts see it more as a weakness in the company's operations, especially considering state-of-the-art weather predictions that are geared to retail planning. “September was a difficult month from a weather perspective, but H&M monthly sales have been disappointing more often than not over the past year,” Societe General analyst Anne Critchlow told Bloomberg.