H&M turns the corner after 11% stock surge

HENNES & Mauritz surged after the struggling Swedish clothing retailer showed progress coping with a build-up of unsold garments, raising hopes that the worst may be over after a three-year slump in earnings.

Inventory dropped slightly as a proportion of sales, easing to 18.2 percent at the end of May from a record 18.9 percent as of last August, H&M said yesterday. Chief executive KarlJohan Persson said H&M still aims to boost operating profit this year. The stock rose as much as 11 percent in Stockholm.

A pick-up in revenue growth at the start of the third quarter helped by a heat wave in Europe is boosting optimism that the retailer may have returned to a level of sales growth that could gradually put the inventory issue behind it. H&M pledged to reduce discounts for a fourth consecutive quarter as it aims to reduce its 40 billion kronor (R61bn) build-up of unsold garments.

Analysts pointed to the June revenue growth of 12 percent as the trigger for the share gain. The stock can be volatile, because short sellers have targeted H&M, betting against almost a fifth of the freely traded shares.

The retailer said that the composition of inventory has improved, implying it will become easier to sell the garments. The family-controlled company has a goal of eventually reducing stock-in-trade from 12 percent to 14 percent of sales, a level last seen three years ago. When asked in an interview if that could take four to five years, Persson said it should be less than that, saying he’s “confident” H&M is heading in the right direction.

“H&M is improving its offer, which should lead to a sales and earnings recovery in time, albeit with execution risk in an ongoing tough competitive environment,” wrote Richard Chamberlain, an analyst at RBC Europe.

The company has recently been offering discounts of up to half off on summer clothes, offering $1.99 (R28.43) camisole tops, $25.99 faux leather biker jackets and skinny jeans for $8.99.

H&M also cut this year’s store expansion plan by 26 percent, while pledging more investment in e-commerce. H&M now expects 130 net store openings, further decelerating from a rate that exceeded 400 in recent years. Most of the new H&M shops will be outside of Europe and the US as the retailer seeks faster-growing markets. | Bloomberg