CEO Daniel Ervér Plans to Upscale H& M Experience While Lowering Prices
● Shares jumped on Wednesday as the company revealed its upcoming balancing act of consumer expectations, after reporting first-quarter sales down by 2 percent.
PARIS —
Sales down, profit up. Lowering prices, upscaling design. If new H&M Group chief executive officer Daniel Ervér was looking for “exciting friction,” he got it in first-quarter results revealed Wednesday.
Ervér used the term in defining what the company is aiming for in its long-term goals — a mix of fashion-forward clothing with a stronger emphasis on design, while decreasing prices particularly in the U.S.
“Exciting friction” is how Ervér labeled the predicament of pleasing both customers' premiumization desires and their pocketbooks. Ervér was clear that the company will lower prices by the end of 2024.
The words were a reaction to the mixed bag presented in the results covering in the three months to Feb. 29. Sales were down 2 percent in local currencies yearover-year during the key holiday shopping period, while numbers from the first three weeks of March were up by 2 percent in local currencies, anticipating a stronger second quarter to come.
These are the first results presented under Ervér, who took the reins in a surprise move Jan. 31 after successive quarters of slow and flat sales.
Ervér is sticking to the group's previously stated priority to hit a 10 percent operating margin and focus on profitability: So it is continuing on that path by improving sales, cutting costs and controlling inventory.
Operating profit was up to 2.08 billion Swedish kronor, or 181.4 million euros, as it seeks to hit that goal. That far exceeded analyst expectations, which had anticipated profits of around 125 million euros.
Shared climbed 15.2 percent on Wednesday as investors applauded the beat.
But the new CEO described a tough balancing act ahead as the company seeks to upscale the perception and quality of its flagship H&M brand, while at the same time cutting prices.
H&M has so far been squeezed at both ends, with fast-fashion competitor Zara benefiting from its trendier brand perception to hit historically high sales even as it has raised prices, and Chinese ultra-fast-fashion players like Shein offering bargains galore.
As it aims to lower prices, H&M hopes to up its fashion offer, too. “This is where we want to make what's inaccessible for the many accessible for the many, by having that friction between what is premium, but at a very accessible price. We want to build this brand position,” he said. Ervér explained that that idea extends to fashion design, as well as fancier retail environments.
The company's new retail positioning has been rolled out at its new concept store on London's King's Road opened last Thursday, which offers a more upscale and curated fashion mix along with an improved focus on customer service and styling tips.
“We also see that it's important to regain credibility and win the customers' heart,” Ervér said. He sees physical retail as a major component of doing that and will “ramp up the ambitions” for in-person customer interaction.
The group will revamp 250 stores worldwide, focusing on key cities including New York, Berlin and Stockholm that will be modeled after the new London concept, as well as mid-level mall locations that, while they can't support London-level upgrades, will be “influenced” by this concept.
The group will close net 60 stores over 2024, opening 100 doors in new and growing markets, while shuttering 160 in established markets. About 30 percent of group sales are online, the company said, and it has about 200 million customers in its loyalty program.
At the same time, the company will seek to lower prices, especially in the U.S., where sales were down 7 percent in local currency in the first quarter.
“We look at all our markets…where we need to invest and adjust to make sure that we are competitive, but we have an additional focus on this in the U.S. given the performance,” Ervér said. Inflationary pressures and the popularity of platforms like Shein have hit performance. “The U.S. is one of those markets where we put extra emphasis on making sure that we have the best value for money and have a strong competitive offer,” he said.
Efforts to burnish brand perception will also see increased marketing spend, especially on social media. The group is also trialing an upgraded H&M website in Denmark, with better design and user experience. The site, still in a test period, has boosted sales and engagement in the country and is expected to be rolled out in other markets later this year.
Portfolio brands including Cos, Monki, & Other Stories and Arket performed more strongly than the flagship H&M, with sales up 8 percent in local currencies in the first quarter. While the company wouldn't break it down by brand, executives repeatedly highlighted the performance of Cos, the portfolio brand that is perceived as the most upscale and fashion forward, whose aesthetic fits in with the quiet luxury trend and appeals to an older demographic.
The price point for Cos can be up to four times the H&M or Monki price, and it has presented runway shows in an effort to position itself as a fashion player.
Markdowns continued to bite, with discounts about half a percentage point higher in the first quarter year-over-year. However, Ervér indicated this was a strategy play in the inflationary environment, more than a pure product mix mistake.
“We've been through a climate where we needed to use markdowns to activate the customer bases,” the executive said, noting those markdowns will stabilize in the coming quarters. The company is investing in AI to better predict the right product mix and nearshoring to cut reaction times to fashion trends.
Moving production closer to markets, such as nearshoring European production to Turkey, for example, will also stabilize shipping prices after the upheaval of 2023. The dramatic increase in shipping costs that hit last year at this time has been factored in and Ervér doesn't expect any impact in the coming quarters, though the company is keeping an eye on the geopolitical headwinds and security situation in the Red Sea.
The profit numbers were also boosted by the company's strong cost-control measures after rounds of layoffs in
2023 and in January, as well as lease renegotiations. That discipline is paying off so far. Selling and administrative expenses decreased in the first quarter by 3 percent in local currencies, and the cost-cutting program is expected to result in savings of 2 billion Swedish kronor, or about 175 million euros, once fully implemented.
“We are also continuing to simplify our organization to make it more efficient and faster. Other examples of ongoing improvements include increased nearshoring and enhanced efforts in digitalization and AI, enabling customers to access the most relevant fashion each time they meet with us. The quarter's sales gradually improved during February with well-received spring collections, which is a positive sign that we are on the right track,” Ervér said.
The group also nominated former Goldman Sachs and Investor AB executive Helena Saxon to its board, which is expected to be approved during the company's annual general meeting May 3.