File image

Johannesburg - Hennes & Mauritz said second-quarter price cuts to clear inventory may exceed last year’s, sending the shares tumbling to a four-year low.

CEO Jyrki Tervonen’s comment on a conference call prompted a stock-price reversal after the retailer earlier reported first-quarter earnings that beat estimates and announced the addition of its first new store brand in three years.

H&M’s inventory levels are up 30 percent year-on-year and profit will be hurt should the retailer have to offer deeper discounts, said Michelle Wilson, an analyst at Berenberg. The Swedish company is struggling to keep pace with a larger rival, Zara owner Inditex, which has put a greater emphasis on e-commerce and has proved more adept at responding to shifts in consumer tastes.

“When you’ve got a very mature brand, you reach a point where it becomes challenging to keep up growth,” said  Maureen Hinton, director of retail research at GlobalData in London. “You’ve got to find new markets and new customers, and respond to different elements of a customer’s life.”

The retailer suggested on the conference call that reaching a target for 2017 sales growth of 10 to 15 percent will be challenging, Wilson said.

Tervonen said markdowns will be “more aggressive” if sales don’t improve in April and May.

H&M shares fell 6.5 percent to 221.91 kroner at 12:18 p.m. in Stockholm, after earlier rising as much as 3.6 percent. A close at that level would be the lowest since June 2013.

New brand

The retailer said it will open its first Arket outlet in London in the fall, selling clothing and a limited range of home furnishings at prices slightly above the company’s main brand. Stores in Brussels, Copenhagen and Munich will follow, and the brand will also sell online, initially in 18 European markets.

Arket is the company’s first new label since the launch of & Other Stories in 2014 and will have a focus on men. The range will be supported by a selection of external brands including sneakers from Venga, and men’s shoes from Tricker’s and RM Williams, H&M said. Where possible, the stores will also include a cafe.

Read also: H&M bucks clothing retail trend

Arket’s price range will be most similar to that of the retailer’s COS brand, which sells cotton parka jackets for 125 pounds and suede Oxford shoes for the same price.

H&M said first-quarter pretax profit fell 3.6 percent to 3.21 billion kronor ($362 million), compared with an average estimate of 3.03 billion kronor. The beat was driven by better product buying and fewer markdowns, said Richard Chamberlain, an analyst at RBC Europe.

The fast-fashion retailer gets about 80 percent of its products from Asia, where the dollar’s strength has inflated the cost of purchases of garments, as many currencies in the region are linked to the currency. H&M also said it’s battling with weaker sales in central and southern Europe and in the US.