Signs of progress at H&M as online retail platform rollout is completed?

Stuart Lauchlan Profile picture for user slauchlan March 31, 2019
Summary:
Investors appear to have faith that H&M might just have turned a corner...

H&M
It’s a sign of the times in the febrile retail sector that a company can announce a hefty store closure program on the back of a drop in profits and see its share price soar by nearly 16%.

An uncharitable reading might be that it’s a reflection that things weren’t as bad as investors expected; a more positive one would be that there are - finally - signs that a long-vaunted turn-around strategy is showing some signs of life.

That’s the position that Swedish fashion retailer H&M finds itself in today. This time last year it was struggling to shift 3.2 billion of unsold stock, while attempting to get its back end logistics tech in order and to bring its online sales channel into…well, the early Noughties would be a start. As a case in point, it was noted last month that H&M can only offer Click-and-Collect services in seven out of the 47 markets in which it operates.

But there has been progress, says CEO Karl-Johan Persson, with all markets now up-and-running on the same online platform after Germany became the final territory to go live:

All our online markets are now on the new online platform and for customers in the German market, this means improvements such as faster, more flexible deliveries and more seamless experience across our channels, thanks to better integration between the channels…There’s been a lot of work during the last five years to transition all the markets to the new platform and a lot of investments connected to that as well. And then we have invested a lot in a new warehouse, new automation and so on. So we have much higher capacity now compared to a year before….And connected to that, a lot of automation in the warehouses as well, which will further increase the capacity. So we're happy with the setup.

He adds that the firm is now in a good place for the next stage of its turnaround:

Our focus areas are to create the best customer offering for our brands, which includes the assortment, and the whole customer experience then for all the brands to make sure that we have a fast, efficient and flexible product flow to secure a stable and scalable infrastructure, our tech foundation and also to add growth by expanding through physical stores or online stores and through digital marketplaces.

On that last point, the firm has entered into a partnership with Flipkart-owned - and by extension, Walmart-owned - fashion marketplaces Myntra and Jabong to sell online in the hugely lucrative India market. The deal givesMyntra and Jabong, which boast 15 million customers between them, exclusive rights to sell H&M products online in India for five-six years.

Stores

Offline, trials continue on new format physical stores, the latest opening on London’s Cheapside. Persson says:

When it comes to different store formats, we are trying out many different formats - some full rebuilds so to say, a complete new look and feel of the store, and then some lighter rebuilds as well And also just product presentation and a lot of different things. So we have a whole test program, a lot of good results from that we see. Customer response is really good…So now we're taking the best parts of putting it together into a roll-out package. And when we're ready with that, we will gradually improve the store portfolio and also the new stores that we will open when we are ready with that. So it feels promising, but it's just a start.

Meanwhile there are more store closures on the cards - 50 across Europe - but this is balanced out by plans to open 175 new outlets in fast growing markets. Currently India, China and Poland are performing better than the likes of the UK or the domestic Swedish market, while Germany has seen sales fall, although that is attributable to the shift to the new online platform disrupting performance.

My take

H&M certainly finds itself in a much better place than it was at the same time last year - admittedly, not difficult -  with a lot of the final online platform pieces falling into place. But as Persson admits:

It’s still a shaky market and we are still in a transition period.

But investors response to the firm’s latest quarterly report clearly indicates confidence that the potential for recovery is there. The Flipkart/Walmart tie-up is a savvy move in a market with explosive potential. The passage to India and all the money that’s waiting for retailers there is via the third-party marketplaces, particularly as the authorities still havent brought clarity to the national e-commerce regulatory regime.

Persson wisely couches his forward guidance for the firm in terms of “gradual improvement”. That’s a good move - setting expectations at that level hopefully means that any surprises ahead will be perceived as pleasant ones. But there’s still a long way to go before the share price gets as bump because performance wasn’t as bad as everyone though it would be…

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