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H&M’s Extensive Turnaround Plan Not Expected to Gain Traction Until 2019

Count H&M among the retailers attempting to turn things around.

The fast-fashion retailer last month reported a 34-percent drop in profits on a 4 percent drop in sales in Q4 of 2017, marking two years of disappointing performance.

During its Capital Markets Day, the company acknowledged the areas in which it needs to improve and outlined the ways in which it is addressing each problem area. The event, according to H&M Chairman Stefan Persson, was an attempt to manage the “uncertainty” and “doubt” in the market.

Though H&M shared an extensive, multi-pronged approach, it also warned that its efforts were unlikely to turn result in improved sales before next year.

The vision

For the H&M brand specifically, the focus is on improving brick-and-mortar sales.

“We are not pleased with performance for the last two years, which has been far below our plan,” said CFO Jyrki Tervonen, adding that in-store comps at H&M stores have been the chief culprit. “We haven’t improved our customer offering and shopping experience enough during the last few years.”

Tervonen admitted that H&M’s assortment missed the mark last year, which resulted in the low comp sales, ballooning inventory levels, and an increase in markdown activity.

“Stock in trade was 16.9% of our net sales,” he said. “Our target is to come back to levels before 2016, which is 12 to 14 percent.” Based on these stock levels and deeper discounts, the company said comp sales are expected to remain negative in 2018. Tervonen said it will be 2019 before it reaches its target levels again. Once inventory is better in check, H&M said markdowns will decrease accordingly.

H&M is testing new store formats that feature a more shoppable environment thanks to less merchandise, a warmer feeling and more of an emphasis on experiences. By creating an emotional tie with consumers, H&M will better be able to address their evolving demands, according to Daniel Claesson, head of business development for the H&M brand. “Tolerance of friction is getting lower and lower but the demand for experiences is getting higher and higher,” he said. “The store needs to be something else. Just removing friction will not be enough.”

H&M is also implementing features to make the stores easier to shop, which it hopes to roll out starting at the end of this year. Through its new in-store mode on its app, shoppers will be able to search the store assortment for specific items, get recommendations based on products available in nearby locations and become alerted whenever a product they’ve favorited is in a store they happen to be passing.

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To help drive more intent, the company is also planning to improve the company’s content, and it’s investing in a new photo studio for that purpose. “Better content drives conversions online and traffic to our physical stores,” he said, adding user-generated content will also play bigger role. “We see higher conversions on visits that interact with user-generated content.”

The plan

To support these aspects of the turnaround, the H&M brand outlined a plan to overhaul its customer-driven supply chain, use advanced analytics and leverage its tech foundation.

Claesson said the brand is aiming for a more flexible supply chain that will allow it to make its assortments more relevant and products more available to customers. The goal is also to speed up the development timeline through 3D sampling, working closure with its suppliers and platforming more components.

H&M plans to marry this supply chain tune-up with advanced analytics to better allocate products to the correct stores. A deeper dive into the data associated with the brand’s 800 billion transactions will also allow it to forecast trends 3 to 8 months out and make personalization a reality from presentation through checkout and delivery, he said.

RFID, which H&M began implementing late last year, promises to increase stock accuracy and visibility, allowing shoppers to find the styles and sizes they want easier. The goal, Claesson said, is to have RFID in 80 percent of stores in 2019.

The reaction

Despite the far-reaching strategy, investor and analyst reaction was skeptical at best.

“The guidance was good and the spirit positive, but H&M has missed its targets significantly so far,” Joakim Bornold, investment adviser at Nordnet AB, told Bloomberg. “So what are today’s beautiful words worth?”

Addressing the long-term nature of many of the stated improvements and the company’s expectation that comp store sales will continue heading in the wrong direction in 2018, Claes Hemberg, investment adviser at Avanza AB, added, “This is like a teenager with bad grades who says, ‘Next year, next year.’ No, I want it this year.”