by Paris — Sales down, profit up. Lowering prices, upscaling design. If new H&M Group chief executive Daniel Ervér was looking for “exciting friction”, he found it in the first quarter results revealed on Wednesday.
Ervér used the term to describe what the company is aiming for in its long-term goals – a combination of fashion-forward clothing with a stronger emphasis on design, and reducing prices especially in the US.
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“Exciting friction,” is how Ervér labeled the tendency to please customers’ premium desires and their pocketbooks. Ervér was clear that the company will reduce prices by the end of 2024.
The words were a reaction to the mixed bag presented in the results covering the three months to February 29. Sales in local currencies were down two per cent year-on-year during the key holiday shopping period, while the number of sales from the first three weeks. of March there was a two percent increase in local currencies, expecting a stronger second quarter to come.
These are the first results presented under Ervér, who took the reins in a surprise move on January 31 after consecutive quarters of slow and flat sales.
Ervér is sticking to the group’s previously mentioned priority of achieving an operating margin of 10 percent and focusing 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, while trying to reach that target. That exceeded the expectations of analysts, who had predicted a profit of around 125 million euros.
Shares jumped nearly 20 percent in midday trading as investors applauded the blow.
But the new CEO described a tough balancing act ahead as the company tries to raise the perception and quality of its flagship H&M brand, while reducing prices.
H&M has so far been under pressure from both sides, with fashion rival Zara capitalizing on its trendier brand attitude to achieve high sales even as it raised prices, and Chinese fashion players such as Shein offering to lots of deals.
As it aims to lower prices, H&M also hopes to increase its fashion offering. “This is the place where we want to do what is inaccessible to many people, by having that friction between the most premium thing, but at a very accessible price. We want to build the position of this brand,” he said. Ervér explained that this idea extends to fashion design, as well as more sophisticated retail environments.
The company’s new retail location has been implemented at its new concept store on London’s King’s Road which opened last Thursday, offering a mix of higher and more conservative fashion with an enhanced focus on customer service and style cues.
“We also see that it is important to regain credibility and win the hearts of customers,” said Ervér. He sees physical retail as a key part of making that work and will “accelerate the ambitions” of personal interaction with customers.
The group will revamp 250 stores worldwide, targeting major cities including New York, Berlin and Stockholm that will be based on the new London concept, as well as low-end locations that cannot, though not can support upgrades at the London level, this concept will “affect” them.
The group will close a net 60 stores during 2024, opening 100 doors in new and growing markets, while closing 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 look to lower prices, especially in the United States, 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 we’re competitive, but we have an extra focus on this in the US given performance,” Ervér said. Performance has been hit by inflationary pressures and the popularity of platforms like Shein. “The US is one of those markets where we put extra emphasis on making sure we have the best value for money and that we have a strong competitive proposition,” he said.
Efforts to build brand awareness will also see increased marketing spend, particularly on social media. The group is also trialling an upgraded H&M website in Denmark, with better design and user experience. The site, which is still in a testing 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 outperformed 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 emphasized the performance of COS, the portfolio brand seen as the most upscale and fashion forward, which aesthetically fits the quiet luxury trend and appeals to an older demographic.
The price point for COS can be up to four times that of H&M or Monki, 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 pointed out that this is a strategy play in the inflationary environment, more than a pure product mix mistake.
“We’ve been through a climate where we’ve had to use markdowns to activate the customer bases,” the executive said, noting that those markups will stabilize in the coming quarters. The company is investing in AI to better predict the right product mix and reduce response times to fashion trends.
By moving production closer to markets, such as closing European production to Turkey, for example, shipping prices will also stabilize after the upheaval in 2023. The significant increase in shipping costs that occurred was taken into account last year at this time and Ervér does not count. expect any impact in the coming quarter, although the company is watching the geopolitical headwinds and the security situation in the Red Sea.
The company’s strong cost control measures also boosted the profit numbers after rounds of layoffs in 2023 and January, as well as lease renegotiations. That discipline is paying off so far. Selling and administrative expenses fell by three percent in the first quarter 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 implemented. fully implemented.
“We are also continuing to simplify our organization to make it more efficient and faster. Other examples of ongoing improvements include increased mass supply and enhanced efforts in digitization and AI, enabling customers to access the most relevant way every time they meet us. Quarterly sales gradually improved during February with spring collections being well received, which is a positive sign that we are on the right track,” said Ervér.
The group has also named former Goldman Sachs and Investor AB executive Helena Saxon to its board, who is expected to be approved during the company’s annual general meeting on May 3.
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