H&M (HNNMY) is giving itself a makeover, revamping its logistics and omni-channel strategy as well as launching a new brand as first quarter sales lagged forecasts and inventories increased.
H&M is lagging behind its competitor Zara-owner Inditex (IDEXY) , which has experienced double-digit sales growth due in large part to its logistics and business model that allow the retailer to get designs into stores faster.
This is something H&M is trying to emulate by "investing significantly" in its supply chain, including a new logistics system with greater levels of automation, and optimizing lead times. "In the changes we are making advanced analytics will provide important support for decision making," Persson said.
The company is also investing more in its omni-channel strategy to integrate stores with online sales.
On top of that the retailer is also upgrading its store portfolio and launching a slightly higher priced brand called ARKET. These stores will also include cafes based on New Nordic Kitchen. The first store will open in London in the fall of 2017.
"We are making these changes at a fast pace in order to reach our desired outcome," Persson said. "This will gradually have an effect and thus enhance our opportunities to achieve good performance during the remainder of 2017 and going forward."
But is this speed fast enough for shareholders? H&M stock has lost 15% of its value of the past 52 weeks, while Inditex has gained 8.33%. Early trading in Stockholm suggests the shares are under further pressure, falling more than 3% in the opening hour of trading to change hands at SEK229.1 each extending its three month loss to around 10%.
The reaction to what was seen a solid - but not spectacular -- first quarter earnings release underscores the challenges Europe's fashion retailers are facing. H&M reported a 7% increase in sales to SEK54.4 billion ($6.12 billion) in the three months ending in February, and a gross margin of 52.1%, well ahead of the 51.4% forecast by analysts. After tax profit was tabbed at SEK2.457 billion, H&M said, against a Street forecast of SEK 2.32 billion, negatively affected by lower sales growth than planned and higher mark downs.
"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.
Morgan Stanley, however, said that inventory levels were "very concerning" and CFO Jyrki Tervonen warned of potential markdowns as a result.
That concern reflects the caution outlined in McKinsey & Co.'s "State of Fashion 2017" report, which said the industry will experience "glimmers of a rebound" driven by luxury brands and athletic wear this year but also likely see declines in its discount category.
"Not only are consumers demanding more customized and personalized fashion, but they are also increasingly expecting it at lower prices," McKinsey & Co. said in a 2016 end-of-the-year report. "While such tactics are useful to drive footfall in the short-term, they are generally unhealthy for fashion companies, as mark-downs and promotions eventually lead to a 'race to the bottom' that shrinks profit margins and eats away at brand value."