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China Hobbles H&M Recovery as Chain Pilots Virtual Try-On

China fell out of H&M’s top-10 markets in a third quarter otherwise marked by improving profits. The turn of events prompted one analyst on the Swedish retailer’s earnings call to speculate that sales in the country are “at least down 40 percent year-over-year” in the wake of consumers boycotting brands that spoke out against Xinjiang sourcing. 

In a Nutshell: CEO Helena Helmersson offered little explanation for H&M’s results in China. “When it comes to China, we are still in a complex situation and we, unfortunately, won’t be able to answer more questions on that,” she said.

Discussing previous Q1 results, Helmersson said H&M is “working together with our colleagues in China to do everything we can to manage the current challenges and find a way forward. China is a very important market to us, and our long-term commitment to the country remains strong. Having been present there for more than 30 years, we have witnessed remarkable progress within the Chinese textile industry.”

She also emphasized that H&M wants to be a “responsible buyer in China and elsewhere and are now building forward-looking strategies and actively working on next steps with regards to material sourcing.” As a global company, H&M complies with “local laws and regulatory frameworks in all the markets where we operate. Our company values are built on trust, respect, integrity and dialogue,” she added.

In July, Helmersson would only say the company was still in a complex situation regarding China. The first-quarter report showed China trailed U.S. and Germany at No. 3 on its leading markets. By the second-quarter, China fell to sixth place, before dropping off the list in the most recent quarter.

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H&M wasn’t the only Western brand raising concerns over labor practices in Xinjiang. Nike. Burberry and other big names similarly faced a backlash and repercussions from Chinese consumers. China has long been one of H&M’s biggest suppliers, though Bangladesh is quickly rising as one of the company’s most critical suppliers.

Meanwhile, with restrictions easing in many local economies, H&M said store sales have started to recover. New autumn collections thus far have been “well received.”

“Sales in September 2021 were slightly higher than in the corresponding month the previous year in local currencies, even though demand was not able to be fully met because of disruption and delays in product flow,” it said.

Lockdowns and restrictions slowed progress, particularly in Asia. Excluding Asia and Oceana, sales in local currencies bounced back to pre-pandemic, H&M said.

“The H&M group’s increase in profit shows that the strong recovery is continuing—despite sales being partly affected by restrictions and delays associated with the pandemic. The results are explained by much-appreciated collections, lower markdowns and good cost control combined with the initiatives implemented in areas such as tech and the supply chain. As restrictions have been eased in many markets store sales have started to pick up again, all while online sales have continued to grow,” CEO Helena Helmersson said.

While profits are now better than pre-pandemic levels, Helmersson warned that the “pandemic and its consequences are still not over.”

Markdown costs in relation to sales fell 2.5 percentage points in the quarter. H&M reported “substantially higher shipping and raw materials prices” in the period, with dollar exchange rate offsetting these increases.

H&M has leveraged its “financial strength and long-term approach” to invest in technology, material innovation and sustainable initiatives. Its ambition to lead circular, renewable change in fashion industry was “recognised recently when the H&M group was named as the only retail company in the world to live up to the UN Global Compact sustainability principles,” Helmersson said.

The Swedish retailer continues negotiating store leases with landlords. “The H&M group’s contracts allow around a third of leases to be renegotiated or exited each year,” it said.

H&M plans to end the current financial year with 108 new stores and 325 closed doors, with a net decrease of 215 locations. In Q4 it aims to open 40 new stores and close 95.

The company plans a digital launch in Chile this fall, with the Peru, Columbia and Uruguay set for the first half of 2022. Next year it plans to open new company-owned stores in Ecuador, North Macedonia and Kosovo, and franchise stores in Costa Rica and Cambodia. Its first store in Panama opened in September with a franchise partner. This fall, Monki will launch on the e-commerce platform Zalora in the Philippines, while &Other Stories will begin offering a curated collection at Nordstrom.

In the battle of the two fast-fashion behemoths that is H&M and Zara parent Inditex, Zara appears to be leading the race in regaining lost sales when considering the June and July overlap in their reporting quarters. However, there isn’t really an apples-to-apples comparison as Inditex’s third quarter begins in May and H&M in June.

Inditex, which said its second quarter sales rose 7 percent, did note earlier this month when it posted second quarter results that online sales in local currencies between Aug. 1 and Sept. 9, 2021, grew 22 percent, while H&M only said the same metric rose 22 percent for the third quarter ended Aug. 31.

NeXR virtual try-on

Though Inditex has been busy building out digitally enabled stores, its rival is no slouch in this regard.

H&M Germany on Thursday announced a new virtual fitting room pilot. H&Mbeyond, its innovation arm, is working with NeXR Technologies to equip two Berlin stores and a third in Hamburg with the virtual reality tech startup’s Fusion III body scanners, turning consumers’ precise dimensions into their “digital twin” or avatar. From Oct. 14-Nov. 6, shoppers can access this experience and use their virtual likeness inside NeXR’s AvatarCloud app (available on Android and iOS) to model 30 “matching styles” from H&M’s latest collection, though it wasn’t immediately clear if the pilot covers only women’s fashion or includes men’s and children, too. NeXR says its tech can easily convert additional fashion collections for virtual try-on.

According to Markus Peuler, managing director of NeXR Technologies SE, working with H&M to pilot the body-scanning tech and virtual fitting room advances its “long-term contribution to sustainability in the textile industry.”

Net Sales:  Net sales for the quarter rose 9 percent to 55.59 billion Swedish kronors ($6.35 billion) from year-ago results. Online sales rose 22 percent in local currencies.

To start the quarter on June 1, around 180 doors were temporarily closed, and about 100 remained so three months later on Aug. 31. Just 50 haven’t reopened as of Sept. 30. Store sales have started to recover in markets lifting restrictions.

Inventory levels fell 12 percent to 36.87 billion Swedish kronor ($4.21 billion), while gross margins rose to 53.2 percent from 48.9 percent a year ago.

For the nine months, net sales improved 6 percent to 142.15 billion Swedish kronor ($16.22 billion) from year-ago results.

Earnings: Pre-tax profits rose 158 percent to 6.09 billion Swedish kronor ($694.8 million) from a year ago.

For the nine months, the net profit was 8.3 billion Swedish kronor ($946.9 million), against the year-ago loss of 1.61 billion Swedish kronor ($183.7 million).

CEO’s Take: “The pandemic and its consequences are not yet over and we are humbled by the many challenges in the world around us that affect our business, which call for a high level of flexibility and drive. We have quickly adapted by prioritising cash flow, cost control and flexibility,” Helmersson said. “With our continued transformation and our well-positioned customer offering—to meet customers’ ever increasing expectations of good value and sustainable fashion—we are optimistic that we will see long-term, profitable and sustainable growth for the H&M Group.”