Consumer product

H&M Profit Plunge after Clearance Sales, Unsold Garments

Hennes & Mauritz AB reported weak earnings in the first quarter after being forced to hold “substantial” clearance sales to address stock imbalances and accumulating a record pile of unsold garments worth more than $4 billion.

The Swedish clothing retailer blamed weak sales in the fourth quarter of 2017, as well as the “unusually” cold winter weather for the stock imbalance. It said the subsequent sales fall also had a negative effect on the sales of spring clothing.

Winter Weather

H&M’s already-downbeat forecast for the start of 2018 was exacerbated by unseasonably warm European weather in January followed by February’s cold snap, whipsawing the clothing retail industry. That forced the company to slash prices, even more, to try to clear inventory. Chief Executive Officer Karl-Johan Persson said Tuesday the company made mistakes by narrowing its assortment last year, though he expects sales to improve in the second half.

Persson said H&M plans to reduce markdowns in the second half when sales should improve. He forecast that the retailer will reduce inventory to 12 percent to 14 percent of sales in 2019.

“We haven’t improved fast enough,” said the billionaire CEO, 43. “We’re working hard to fix that.”

H&M said it’s maintaining its targets for sales growth of at least 25 percent from e-commerce and new businesses this year, even though it missed that rate in the first quarter. Online sales rose 20 percent while revenue from new businesses gained 15 percent.

Weak Sales

Operating profit fell 62 percent to the lowest level in 16 years as inventory rose to 17.6 percent of sales in the first quarter. The stock slumped to the lowest in almost a decade.

The retailer said it booked a positive tax income of 399 million Swedish kronor due to the recent U.S. tax reform.

Sales including value-added tax fell to 53.55 billion Swedish kronor from 54.37 billion Swedish kronor, as announced earlier this month. Sales excluding VAT totaled 46.18 billion Swedish kronor versus 46.99 billion Swedish kronor, H&M said.

The retailer said it expects sales for online and new business to grow by more than 25% during 2018, with full-year results likely “somewhat better” than a year earlier, it said.

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