H&M has closed the first half of 2018 with a substantial amount of excess stock, equating to US$4 billion of inventory.
The global fast-fashion retailer released its second quarter results for the period ending May 31 on Thursday, reporting a 28 percent drop in profits.
According to H&M’s CEO, Karl-Johan Persson, this decline in half-yearly profits didn’t come as a surprise as the business started the year with “too much stock”.
“As we signalled previously, it was going to be a tough first half-year. We went into the second quarter carrying too much stock and we still had some imbalances in the H&M assortment – something that we are gradually correcting,” he said.
As profits shrunk 28 percent to $6 billion, the Swedish retail giant’s sales also flatlined in a number of regions, with total sales of Skr 98.2 billion (roughly USS10.8 billion) in the second quarter (March 1 to May 31, 2018).
This drop in sales has been attributed to the company’s “transformation” period, with resources reportedly being funnelled into a new logistics system, which caused “temporary interruptions”.
“As part of our transformation work we are transitioning our logistics systems to make our supply chain even faster, more flexible and more efficient. These transitions are complicated and can result in temporary interruptions, as unfortunately occurred during the second quarter in some of our major sales markets,” Persson said.
According to H&M’s interim report, in-store sales were impacted in the US, France, Italy and Belgium, while online sales took a hit in the Nordic region.
Although, analysts believe that H&M’s struggles extend beyond its excess stock issues, claiming the business took too long to establish a strong e-commerce presence, which has resulted in its shares dropping roughly 18 percent since the start of 2018.
According to a report published by Moody’s in April, retail sector defaults across the globe are at an all-time high, as the rise of e-commerce continues to chip away at traditional bricks-and-mortar retail sales. Now, H&M finds itself competing against the likes of ASOS, and Amazon’s growing fashion categories in a number of its established markets.
Not All Doom and Gloom For H&M
Despite a slow start to the year, the company says it’s continuing to invest in its supply chain, tech, advanced analytics and AI.
“There are promising indications from our pilot projects within personalisation, quantification, allocation and price setting, as well as in trend forecasting. Following on from these positive results, we are now scaling the projects up for more markets and more concepts,” Persson said.
Another key area of focus is its customer experience, both online and in-store, as the retailer is looking to integrate its two sales platforms into a strong omnichannel experience. Over 2018, this is expected to result in a net growth of 240 new stores, as well as further development of the online store and continued focus on its e-store on Alibaba’s Tmall platform.
“In parallel with the development of our own online store, sales of H&M on Tmall have got off to a very good start with tens of millions of visitors in the first couple of months, contributing to increasing sales in China.”
After a difficult first half, H&M remains confident it will experience strong growth and profitability in the last six months of 2018, as well as for years to come.
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