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H&M’s Store-Closing Plan Hints at Fashion’s Digital Future

H&M Group plans to invest more heavily in digital operations as it prepares to close roughly 250 stores next year, or 5 percent of approximately 5,000 global locations.

In a Nutshell: The Swedish fast-fashion giant credited its omnichannel model for steadily increasing value creation. The model focuses on driving “strong and profitable online growth” while optimizing the brick-and-mortar base, said H&M, which is responding to rapid changes in consumer behavior by “stepping up the pace of its transformation further through digital investments, optimization of the store portfolio and increasingly integrated channels.”

H&M plans to close about 250 stores next year, when roughly one-quarter of its stores will be able renegotiate or exit their leases.

“The channel strategy has been going on for quite some years, but what has really shifted and became evident, even more this spring, if you flip it around from the customers’ perspective, is that we’ve been able to keep a lot of the customers that shop with us. They’ve just been discovering new ways of shopping,” Adam Karlsson, H&M chief financial officer, told Sourcing Journal Thursday. “We can also say from the customer data, that they have a higher propensity to shop online, but the two channels are still in a good way reflecting how customers want to meet us. But with all that said, we believe that with all of that knowledge, we can set up the store portfolio more to reflect how the customer is moving.”

Meanwhile, managing through Covid-19 has touched all parts of the business from product purchasing to investments, rents, staffing and financing. Strict cost control also has contributed to a “rapid recovery” in results, H&M said.

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“Through much-appreciated collections and rapid, decisive actions, we returned to profit already in the third quarter. Our employees have made amazing efforts to achieve our fast recovery. Although the challenges are far from over, we believe that the worst is behind us and we are well placed to come out of the crisis stronger,” said CEO Helena Helmersson. “Demand for good value, sustainable products is expected to grow in the wake of the pandemic and our customer offering is well positioned for this. We are now accelerating our transformation work so that we continue to add value for our customers.”

A steady influx of new customers started shopping online during the pandemic, “making it clear they value a convenient and inspiring experience in which stores and online interact and strengthen each other,” she added. “The substantial investments made in recent years have been very important for our recovery and we are now accelerating our transformation work further to meet customers’ expectations…. To ensure that our offerings are relevant to customers and improve availability in all channels, speed and flexibility will be even more important in the future, particularly in the supply chain.”

And despite the coronavirus pandemic’s devastating effect on supply chains, total inventories at H&M remained flat year over year. Markdowns increased half a percentage point, and H&M predicted they would grow 1 percent to 1.5 percent in the current quarter.

“We had more uncertainty in whether the activities we did to sort of adjust the assortment on such short notice would pay off in keeping the relevant inventory, but quarter three has shown that we’ve managed well here, which gave us the best visibility on the demand and whether the adjustments would be appreciated or not,” Karlsson said.

Karlsson admitted that H&M took a more conservative approach to its summer quarter estimates, but “it turned out that the measures we took actually created a stronger and more commercial assortment than we previously or initially expected.”

In addition, Covid-19 has highlighted the importance of sustainability, Helmersson added, noting that demand for good value and sustainable products is expected to grow in the wake of the pandemic. H&M is continuing its efforts to become circular and climate positive, and will increase the share of sustainable and renewable materials, as well as develop new revenue streams, she said.

Beyond the earnings report, H&M Group also revealed that its Cos, Weekday, Monki, & Other Stories and Arket brands will become available online in Russia this fall. H&M’s namesake brand has been available to Russian online customers since 2015.

Net Sales: For the quarter ended Aug. 31, net sales totaled 50.87 billion Swedish krona ($5.71 billion).

Still impacted by Covid-19, sales fell 16 percent in local currencies, H&M said. At the beginning of the quarter, about 900 of the fast-fashion group’s more than 5,000 stores were temporarily closed, dropping to just more than 200 by quarter’s end.

Gross margin for the period was 48.9 percent.

For the nine months, net sales were 134.48 billion ($15.10 billion). Sales were significantly impacted negatively by Covid-19, where as much as 80 percent of the group’s stores were temporarily closed in Q2.

Earnings: Profits for the quarter, after taxes, were 1.82 billion Swedish krona ($204.4 million), or 1.10 ($0.12) per share.

Looking ahead, the company said sales in September, the start of its fourth quarter, fell by 5 percent in local currencies, when compared with the same period a year ago. “Currently 166 stores, representing three percent of the total number of stores, are still closed. A large number of stores still have local restrictions and limited opening hours,” the company said.

For the nine months, after-tax profits were 1.24 billion Swedish krona ($139.3 million), or 0.75 Swedish krona per share ($0.08).

CEO’s Take: “As a result of much-appreciated collections together with rapid and decisive actions, our recovery is going better than expected. We have strong, profitable online growth, and more and more stores have been able to open again. With more full-price sales than expected and strict cost control, we returned to profit already in the third quarter. Our teams around the world have done an amazing job. Although the challenges are far from over, our assessment is that the worst is behind us and we are well placed to come out of the crisis stronger,” Helmersson said.