H&M, one of Europe’s largest fashion retailers, shows missed profits in the first quarter of 2014. According to the Swedish fashion house, this is primarily caused by fighting a battle to keep up with competition.
In Europe, both H&M and Inditex, who owns the Zara brand, have been the leading firms for years; however, competition is picking up, as chains like Primark and Forever 21 are expanding rapidly. Additionally, H&M has suffered from online competition, as online stores like ASOS have become increasingly popular among fashion addicts.
H&M admits that online sales have had a slow start in the first quarter of 2014 and that the missed profit is primarily caused by the investments in their online shop. The online shop went live in France in the first quarter and China, Spain and Italy are on the list for the rest of the year. Additionally, Australia, the Philippines and India will be new markets for H&M in 2014 and there are plans to open 375 new stores.
Although the online fashion battle has caused H&M to miss some of its profit, it keeps confidence. CEO Karl-Johan Persson says that operating profit increased 8.7 percent, but this would have been 14 percent, had it not invested in their online activities. “Sales have started off well, considering that we are in a fashion retail market that is characterized by challenging macroeconomic situations. We continue to gain market share,” he says.
Anne Critchlow, analyst at Societe Generale, says, “It is not what we had hoped for. H&M’s operating costs grew more than we expected, but at the same time it is great that they are keeping up with their competition in order to grow in the future. There should be no issue in the long-term, but the operating costs hit the first quarter in a big way.”
Jamie Merriman, analyst of Sanford C. Bernstein, agrees partly. He says, “These are disappointing results. Although they are caused by long-term investments, I also think it is a sign of weak like-to-like sales performance and price investments.”
The retailer’s gross profit margin was reported to be 54.9 percent in the first quarter, while forecasted at 55.3 percent. Additionally, the number went down from 55.2 percent a year ago. Competitor Inditex remained flat in gross margin, managing to keep it at 57.9 percent. Analysts say they had hoped for the same for H&M.
The expansion of their online store and their presence in new countries is not the only strategy to keep up with competition. At the same time it is also expanding itself into new mid-market brands with stores like COS, where sleek, Swedish fashion is sold at slightly more expensive prices. COS stores were only present in a few countries until now, but for 2014, stores are planned for rollout in several new countries. Additionally, it will also roll out its new sports collection to more stores and countries.
While H&M missed profit in the battle to remain one of Europe’s largest fashion retailers, CEO Karl-Johan Persson is confident that new strategies will lead to a healthy growth in the rest of the year.
By Diana Herst