Pedestrians pass in front of a Hennes & Mauritz AB (H&M) store in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

H&M's Pile of Unsold Garments Grows as Earnings Plunge

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

Operating profit fell 62 percent to the lowest level in more than a decade as clearance sales failed to reduce quantities of T-shirts and jeans that customers had passed over. The stock slumped to the lowest level since 2005.

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

H&M's Pile of Unsold Garments Grows as Earnings Plunge

The shares traded 5.4 percent lower at 120.54 kronor as of 12:37 p.m. in Stockholm.

Persson said H&M plans to reduce markdowns in the second half, when sales should improve and a weaker dollar will reduce garment costs.

The retailer aims to reduce inventory to 12 percent to 14 percent of sales in 2019. Stock-in-trade rose to almost 18 percent of sales in the first quarter. H&M said most of that is spring garments, though a small portion is older than 12 months.

Mistakes Made

H&M's Pile of Unsold Garments Grows as Earnings Plunge

“We haven’t improved fast enough,” said the 43-year-old scion of the billionaire Persson family. “We’re working hard to fix that.”

The retailer is starting 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. Persson reiterated H&M’s forecast for some improvement in operating profit this year. Analysts expect a 7 percent drop.

“The next 12-18 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.

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

H&M might have e-commerce in place in all its markets by 2020, Persson said. This month, the retailer began online sales in India and launched H&M on Alibaba Group Holdings Ltd.’s Tmall service in China. The retailer doesn’t plan any more new brands this year, though could consider doing so in 2019, Persson also said.

©2018 Bloomberg L.P.