H&M Hennes & Mauritz AB (HNNMY) shares slumped the lowest level in thirteen years Tuesday after the world's second-largest clothing retailer said an inventory overhang and tepid spring fashion demand hit its quarterly earnings even as it vowed to meet full-year profit estimates.
H&M said its pre-tax profit for the three months ending in February, the Stockholm-based group's fiscal first quarter, fell 61% to SEK1.26 billion ($153.7 million) as its gross margin declined to 49.9%. Currency-neutral sales for the quarter came in at SEK53.55 billion, the company said. Overall inventories also swelled 7% to a value of around $4 billion, largely as a result of weaker-than-expected sales, and will likely "lead to increased markdowns in the second quarter", the group said.
"Weak sales in the forth quarter, partly caused by imbalances in the assortment for the H&M brand, resulted in the need for substantial clearance sales in the first quarter," said CEO Karl-Johan Persson. "The high level of clearance sales combined with unusually cold winter weather had a negative impact on the sales of the spring garments."
"Many of our ongoing initiatives are giving good indications and results, even though they have not yet been implemented at a large enough scale to have a decisive effect on the overall results," he added. "The weak sales development combined with substantial markdowns had a significant negative impact on results in the first quarter."
H&M shares plunged 7.02% in Stockholm trading to change hands at SEK118.42 each, the lowest since 2005, and accelerating its 52-week decline past 50%.
"The external buying environment has turned positive in Q2 as expected but inventory to sales remains high, thus causing a risk of further markdown pressure in the coming quarters," said analysts at RBC.
Earlier this month, H&M's chief rival, Inditex SA posted full-year earnings of €3.4 billion on sales of around €23.5 billion that were largely in-line with analysts' forecasts and boosted its full-year dividend by 10.3% to €0.75 a share.
Gross margins at the world's largest clothing retailer, however, slipped by 1.3 percentage points from 2016 the first three months of the year to 53.5% of sales, suggesting that both it and rivals are struggling to pass on cost increases to customers in a fiercely competitive markets.