H&M Group is increasing the number of stores it plans to close this year from 130 to 170 as the fast-fashion retailer attempts to cut costs and shift to digital in the wake of the COVID-19 pandemic. The company also will reduce the number of stores it planned to open this year from 200 to 130, resulting in a net decrease of 40 stores across the company.
The store closures come as the Swedish apparel juggernaut saw net sales drop 23 percent in the first half of the year to 83.61 billion Swedish krona ($8.95 billion), while second-quarter revenues plunged 50 percent to 28.66 billion krona ($3.07 billion).
Currently, 350 locations—approximately 7 percent of the company’s 5,000+ stores worldwide—remain closed. In mid-April, as many as 80 percent of H&M Group’s stores were closed.
In a Nutshell: The store closures appear to come as the fashion group takes the opportunity to convert more of its business to digital. According to H&M Group CEO Helena Helmersson, the company is focused on redirecting product flow to its digital channels, which remained open in 48 of its 51 online markets.
Online sales increased by 36 percent during the quarter and accounted for 28 percent of total company sales throughout the half. The 28 percent total is a decent jump from H&M’s 16 percent online penetration in the 2019 fiscal year.
H&M’s online push comes as one of its biggest rivals is prepping the same. Inditex, which owns Zara and Massimo Dutti among other brands, announced earlier this month that it is also closing between 1,000 to 1,200 stores over the next two years as it expects online sales to account for one-quarter of its business by 2022. Inditex reported its first-ever quarterly loss during the pandemic.
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As the pandemic spread worldwide, H&M made rapid adjustments to product purchasing and buying plans, and was able to reduce inventory levels slightly (0.01 percent) in the second quarter compared with the previous year.
However, since there is an oversupply of spring products throughout the industry, and the apparel market remains sluggish overall, the company expects the cost of markdowns in relation to sales to increase by approximately 2 percent to 3 percent in the third quarter.
H&M Group’s liquidity remains in a good position. As of May 31, cash and cash equivalents amounted to 12.7 billion krona ($1.36 billion). Cash and cash equivalents plus undrawn credit facilities totaled 31.24 billion krona ($3.35 billion).
Net Sales: For the three months from March 1 to May 31, total revenue slumped 50 percent to 28.66 billion krona ($3.07 billion) from 57.47 billion ($6.15 billion). In the first half, sales dropped 23 percent to 83.61 billion krona ($8.95 billion).
Net Earnings: Net loss after taxes for the second quarter amounted to 4.99 billion krona ($530 million), corresponding to a loss of 3.02 krona (32 cents) per share. Pretax loss was 6.5 billion krona ($695 million) against a year-earlier profit of 5.9 billion ($630 million). Analysts had on average forecast a 6.4 billion krona ($683.8 million) loss, according to Refinitiv data.
Quarterly gross profit amounted to 13.28 billion krona ($1.42 billion) which corresponds to a gross margin of 46.3 percent, down heavily year over year from margins of 55.4 percent. The decrease in gross margin is mainly due to the costs included in “cost of goods sold” that cannot be adjusted at the same pace as the rapid evolution of the COVID-19 crisis.
For the first half, the group saw net losses after tax of 3.06 billion krona ($330 million), with losses totaling 1.85 krona (20 cents) per share.
CEO’s Take: “It is clear that the rapid changes in customer behavior caused by the pandemic will further speed up the digitalization of fashion retail,” said Helmersson in a statement. “To meet this, we are continuing to adapt the organization and improve our ways of working, which will make us more flexible, fast and efficient. We are accelerating our digital development, optimizing the store portfolio and further integrating the channels. Our leading sustainability work will also contribute to strengthening our position and ensure the long-term positive development of the H&M Group.”