People ride escalators in an H&M store in New York. (Photographer: Daniel Acker/Bloomberg News)

H&M Plunges Most in 16 Years After Trouncing by Rival Zara

(Bloomberg) -- Hennes & Mauritz AB shares plummeted after the Swedish apparel chain lost more ground to Inditex SA’s Zara, amid a crisis in brick-and-mortar stores that threatens to undermine retailers with underdeveloped online businesses.

H&M reported the biggest drop in quarterly sales in at least a decade Friday as fewer customers visited its flagship brand’s locations, leading the company to pare expansion plans and consider closures. The stock fell as much as 16 percent, the steepest intraday decline since March 2001. H&M is attracting short selling, which peaked in the stock recently.

A crisis that’s shuttered shopping malls in the U.S. is spreading to other parts of the world, hitting H&M’s earnings and forcing the retailer to cut prices to clear out inventory. Rival Inditex has been outpacing the Swedish company as it expands more aggressively in e-commerce. The Spanish giant this week reported a double-digit rebound in revenue growth for November and early December.

H&M reported “quite possibly the worst quarterly sales performance on record,” wrote Cedric Lecasble, an analyst at Raymond James.

Sales excluding value-added tax fell 4 percent to 50.4 billion kronor ($6 billion) in the three months through November, the Stockholm-based fashion retailer said. Analysts expected revenue to increase 2 percent. H&M’s sales have declined in only three quarters in the past 10 years, according to data compiled by Bloomberg.

Almost 15 percent of H&M’s free float -- the shares that are readily available to trade -- has been shorted, according to Markit Securities data. In a short sale, investors borrow shares and sell them in the hope that they decline, allowing them to repurchase them more cheaply and pocket the price difference as profit.

Inditex CEO Pablo Isla said Wednesday that one of the key tenets of the Spanish company’s strategy is its centralized inventory system, which allows it to decide which clothes to send out to each individual market at the last minute. H&M’s logistics are slower, as the retailer depends more on shipping garments from Asia, which can take weeks or months.

“H&M’s supply chain lacks reactivity, which is one of the group’s structural issues in front of abrupt changes in fashion,” wrote Cedric Rossi, an analyst at Bryan Garnier.  

Other Brands

The company said Friday it aims to accelerate a transformation plan to better integrate physical and digital stores, and it will give more details on strategy changes at a Feb. 14 meeting with investors. The retailer said online sales and revenue of brands other than H&M have been going well.

H&M said in September it planned a net addition of 385 stores this year, which includes 90 closures. The company also said at the time it aimed to have online sales in 43 markets by year-end. Inditex already sells online in 45 markets and is starting to add services such as same-day delivery in key cities.

In an effort to boost e-commerce, H&M said it’s expanding a cooperation agreement with Alibaba Group Holding Ltd.’s Tmall to add additional brands on the Chinese digital platform.

Andreas Inderst, an analyst at Macquarie Capital, said he sees a “clear divergence between winners and losers” and remains “on the sidelines” for H&M, which he rates neutral. He’s positive on Inditex and online retailers Zalando SE and Asos Plc.

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