H&M store closures raise doubts as it adds new retail format

Investors gave a thumbs-down to a Hennes & Mauritz AB turnaround plan that includes the biggest store-closure program in at least a decade and the creation of a new brand to sell marked-down clothing.

The Swedish company plans to shut 170 stores this year, even as its adds a format called Afound, which joins the main H&M chain and other recent additions such as Arket. The retailer said it would invest more in online sales and digital inventory-tracking technology, while adding shops in markets that are still growing.

The shares fell as much as 9.1 per cent to a nine-year low Wednesday in Stockholm. They have lost more than a quarter of their value in the past three months. The slump brings H&M’s market value to 235 billion kronor ($ 36.6 billion), equivalent to about a quarter of what Zara owner Inditex SA is worth.

“There is little in the statement to suggest that H&M can reignite its top line anytime soon,” wrote Richard Chamberlain, an analyst at RBC Capital Markets.

The world’s No. 2 fashion chain by sales has hit a number of roadblocks, reporting the biggest drop in quarterly sales on record. As online shopping has soared, fewer people are visiting H&M’s vast network of physical stores. The company has struggled to cut inventory, which ended the year higher than planned, and H&M said it will increase markdowns by as much as 2 per cent in the first quarter to clear that out.

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The sales woes have forced chief executive officer Karl-Johan Persson to retract a target of 10 per cent to 15 per cent annual sales growth for this year after setting that long-term target 12 months ago. The goal still stands for the future, but could take several years to reach, the CEO said in an interview.

“We’re working toward it, we believe in what we’re doing, but since we haven’t reached the goal we set this year I don’t want to say we’ll reach them for 2019, 2020,” Persson said.

Some investors have sold shares amid fears the company is being too slow in responding to the industry’s digital shift. Didner & Gerge Fonder AB, one of H&M’s top shareholders, has called for a management shakeup. At a news conference Wednesday, Persson said he believes he has the board’s confidence as CEO and declined to comment further on calls for new management.

The company plans 390 new stores. About a quarter of the new shops will be formats other than the flagship H&M, such as COS, Monki and Afound. The latter, the company’s ninth format overall, will consist of stores and websites that offer deals on the company’s own goods as well as merchandise from third parties. 

The first Afound store will be in Stockholm, and the site will go online in Sweden this year. H&M is building a format where it can funnel off excess inventory and is entering part of the market that discount retailers such as Primark and supermarkets have proven can be successful. Afound is a shift in strategy following the last new format, Arket, which sells higher-priced general merchandise, including housewares, purses and coffee.

There’s a risk the new chain may cannibalize H&M’s existing business, according to Michelle Wilson, an analyst at Berenberg. But Afound may not be the end of the new formats from H&M.

“We’re looking at two new business models that really aren’t like anything else we have,” Persson said in the interview.

The Stockholm-based company’s image was also tarnished by accusations of racism after an advertisement featuring a black child wearing a hoodie with the text “coolest monkey in the jungle” sparked a social-media storm and protests in South Africa earlier this month. H&M has apologized for the ad.

H&M’s operating profit fell 14 per cent to 20.6 billion kronor in the 12 months through November, the biggest drop in six years.

Despite speculation among some analysts that H&M would be forced to cut its dividend for the first time since it was listed in 1974, the company kept its payout for 2017 unchanged at 9.75 kronor a share. The company plans to offer shareholders the option to reinvest in new H&M shares instead of receiving the dividend in cash, which analysts said would dilute the stock. Members of the Persson family, collectively H&M’s biggest shareholders, plan to follow that option.

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