SHARE WATCH: H&M expands as it hunts profits on the High Street

IT IS extraordinary how the very best and most prolific business concepts can suddenly hit the buffers. The top names, the High Street “aristos” – the hot shots who could do no wrong – can now on an internet whim find themselves scrambling for their future existence.

It is a deeply familiar position in Britain but they are not the only ones to suffer this uncertainty.

There is a raft of European companies for whom the online challenge is a life or death struggle, even if their managements think things can be put right.

One of these is H&M, the Swedish star of the high street which is currently the second largest retailer in the world after the Spanish retailer Zara.

H&M, formed by Erling Persson, is now more than 60 years old and the thing that made it really famous was the way it kept adding more and more new stores every year. (It is still doing so and this year alone it has plans for another 300 fashion outlets around the world).

All in all, some 123,000 people can call themselves H&M employees and they feature in 4,700 stores around the globe. Interestingly, the group valued at €20bn is run by the founder’s grandson KarlJohan Persson.

Achieving a global reach has been important for the Swedish giant and of particular importance has been lessening its dependence on the European market.

But European sales still account for two-thirds of the group’s business and eight of its top-10 markets are in places like Germany, France and the United Kingdom.

It made a great start in China where it hoped that in a decade it would be selling one-third of its global sales. Now 10 years after the first shop opened in China, that ambition looks to have fallen short.

But as mentioned earlier the business model of continually opening new stores has coincided with the full blast of the internet.

The company is being squeezed on all sides.

It faces online competition from companies like Germany’s Zalando, the UK’s ASOS, and Amazon, and at the lower end of the market it competes with outfits like the Arthur Ryan-inspired Primark.

H&M in 2011 was forced to cede its title of the world’s largest retailer to Zara.

Last year was a terrible year for H&M when it saw its first drop in sales in two decades.

While its online and new brands performed well, the high street stores were the problem due to a drop in foot-fall.

Operating profits and margins fell and its earnings per share were only half that of 2007.

Investors are also concerned as to the increase in stock levels in the last five years, rising from 13 to 19pc.

The shares trade at 15-times forward earnings (Zara is 21 times) and are down on the year.

Up to recently H&M policy was to pay more than half of its after-tax profits in dividends.

However the group has burnt its cash pile and will now have to borrow for any future shareholder payout or reduce them.

The Swedish investment community has been highly critical of Karl-Johan Persson, pointing out that in the last five years while sales increased 60pc the group’s margin, operating profit and return on equity have fallen.

They also question group plans which continually refer to the long term yet ignore the short term.

The same critics would not be unhappy to see significant management changes, although the founding family owning 68pc of the voting rights perhaps lessens the chances of this happening.

In response, H&M bosses are happy they are doing the right thing as the business expands into India, the Middle East and South American markets.

In addition it is launching a new low-cost brand, Afound.

Following the recent poor results, H&M investors’ worry lines are deepened. I would not be rushing to buy the share at the present time.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Business model of continually opening stores has coincided with the full blast of the internet