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H&M’s Sales Growth Shadowed by Fears of an Over-Promotion

Fast fashion retailer H&M released its full-year and fourth quarter sales numbers Monday, reporting strong sales growth, though analysts expressed concerns that the retailer took an overly promotional approach in November in an effort to reduce its expanding inventory issues.

Revenue grew 12 percent to 56.4 billion Swedish kronor ($6.2 billion) during H&M’s fourth quarter, slightly above Wall Street estimates. Annual sales grew 5 percent to 244.3 billion kronor ($26.95 billion) compared to 2017. The company will release its complete full-year report on Jan. 31, 2019. That report will include information on profit and earnings for the fourth quarter and the full year.

Once trading was finished Monday, the day of the sales update, H&M share prices had fallen by about 3 percent to $3.08 from $3.37 after a period of recovery beginning in September. At publication time, the retailer’s shares were trading at $2.99, which is not terribly far from its 52-week low of $2.60.

RBC Capital Market analyst and regular H&M contributor, Richard Chamberlain, sent a letter to clients expressing fears that the organization had overplayed its position in November, Bloomberg reported, putting sales at risk in December. If true, the combined effect of lowered margins and decreased sales could put the company’s Q4 earnings at risk.

However, H&M may be helped by favorable currency conditions in some of its key markets, reporting a 6 percent rise in Q4 sales in local currencies.

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H&M’s inventory levels have become a significant problem for the organization, with the company warning investors in its six-month sales report that its closing inventory levels would likely be too high, due to 13 percent growth in stock-in-trade levels compared to the same period in 2017. As a result, H&M said it would pursue a more aggressive policy toward markdowns in Q3 in an effort to unload excess stock.

Then, despite comparative inventory levels that grew by an additional 2 percent in Q3, H&M said it would not continue to increase markdowns in the fourth quarter, calling inventory levels “manageable” in its third-quarter sales report.

The retailer has suggested its inventory issues are related to “certain imbalances” in its assortment along with stock interruptions due to aggressive inventory transition. It pledged to implement “gradual improvements” to the H&M product assortment designed to improve in-season full-price sales.

H&M’s approach comes in contrast to fast fashion rival, Inditex, which implemented a promotion-averse sales strategy during its fourth quarter. Inditex was able to maintain EBIT margins of 16.7 percent in 2018, despite missing sales estimates and investing heavily in its infrastructure.