H&M's pile of unsold garments grow as earnings plunge

Stockholm - Swedish fashion retailer Hennes & Mauritz said it’s increasing markdowns this quarter after accumulating a record pile of unsold garments worth more than $4bn.

Operating profit fell 62% to the lowest level in 16 years as inventory rose to 17.6% of sales in the first quarter. The stock slumped to the lowest in almost a decade.

“The worrying sign again comes from unabated piling-up of inventory," said Chris Chaviaras, an analyst at Bloomberg Intelligence.

H&M’s already-downbeat forecast for the start of 2018 was exacerbated by unseasonably warm European weather in January followed by February’s cold snap, whipsawing the clothing retail industry. That forced the company to slash prices even more to try to clear inventory.

Chief executive officer Karl-Johan Persson said on Tuesday the company made mistakes by narrowing its assortment last year, though he expects sales to improve in the second half.

The shares traded 4.1% lower at 122.10 kronor as of 9:33 in Stockholm.

Persson said H&M plans to reduce markdowns in the second half, when sales should improve. He forecast that the retailer will reduce inventory to 12% to 14% of sales in 2019.

“We haven’t improved fast enough,” said the billionaire CEO, 43. “We’re working hard to fix that.”

The retailer is adding a new brand called Afound to sell clothes from various brands including H&M at a discount, and it’s adding three automated logistics centers this year to speed up deliveries.

Last month, H&M forecast sales in comparable stores to drop this year before returning to growth in fiscal 2019.

“The next 12 to 18 months will be challenging,” wrote Alvira Rao, an analyst at Barclays, who said the initiatives may not be enough to keep up with increasing competition.

“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,” Persson said in a statement.

H&M said it’s maintaining its targets for sales growth of at least 25% from ecommerce and new businesses this year, even though it missed that rate in the first quarter. Online sales rose 20% while revenue from new businesses gained 15%.

H&M also said it began online sales in India and launched H&M on Alibaba’s Tmall service in China, and both projects have started well.