H&M needs a makeover

H&M models
Without radical restyling, sales will continue to fall

The global fashion giant is catching up with rivals online, but it still needs to restyle its core brand. Alice Gråhns reports.

High-street fashion retailer H&M has a problem, says Stephen Wilmot in The Wall Street Journal. It just “isn’t selling enough clothes”. The firm’s shares, which are listed in Stockholm, slipped by 6% last week, after it reported a 20% fall in net profits despite a 4.5% uptick in sales. Given the rapid pace of store openings, that implies a 5% decline in same-store sales.

Having planned for faster growth than it has achieved, H&M finished its spring quarter in May with too much inventory. To clear the backlog it offered unusually big discounts in its summer sale – lowering the operating margin to 9.6% from 12.8% in the same three months last year.

So what’s gone wrong? H&M has trailed its rivals in the shift to online sales, say Dominic Chopping and Saabira Chaudhuri in The Wall Street Journal. There are several internet-only players, notably Asos, fighting the likes of H&M and Zara (owned by Spain’s Inditex), while Amazon has also been muscling in on clothing. However, H&M’s “digitisation process is now in full swing”; in some markets online purchases comprise 25%-30% of sales.

H&M “deserves credit… for creating and investing in new concepts”, says Andrea Felsted on Bloomberg Gadfly. A fashionable Nordic brand, Arket, has now been added to its line-up. But the real problem is the core H&M brand. It “has become the squeezed middle, between more premium names and Primark at the bottom end”. The latter’s foray into the value segment “has made H&M’s cheap chic not quite as cheap as it used to be”.

The business has found itself “in the no-woman’s land of fashion retail”, agrees Lex in the Financial Times. H&M says it is switching to a more efficient supply chain, which should lead to leaner stock levels, but there is still some way to go. Inventories, measured in krona, have climbed faster than sales recently.

The key task now, however, is to “reinject some glamour into its clothing designs and those stores that still do attract customers”, says Wilmot. But chief executive Karl-Johan Persson has been “worryingly quiet” on this topic. He is still busy opening new stores around the world – 385 will appear this year. At this rate, H&M’s spending on store openings could “jeopardise its big dividends”.

He needs to be “bolder”. H&M has global scale and no debt, so it should be able to muster the resources to give the core brand “a radical restyling”. But as long as H&M the brand looks neglected, H&M the company “may continue to disappoint”.

Is Rocket still on course?

Rocket Internet “will soon be swimming in cash”, says Liam Proud on Breakingviews. The German technology investment vehicle has sold half its holding in Delivery Hero AG for €600m, leaving it with 13% of the shares in the European food-delivery group. Rocket now has €2.3bn in the bank, nearly 66% of its market value.

But co-founder and chief executive Oliver Samwer hasn’t said what he wants to do with the money. Until he’s clearer on that score, Rocket’s “bargain-basement valuation will persist”.

Rocket, whose portfolio contains more than 100 start-ups, is “in part responsible for the fact that Berlin is now a tech hotbed”, Berenberg Bank’s Sarah Simon told India’s Economic Times.

It has raised “an enormous amount of capital”. Yet investors have been “wary” of it, says Leila Abboud on Bloomberg Gadfly. The shares are trading at half their 2014 initial public offering price. Poor disclosure is one issue. What’s more, instead of being a traditional tech outfit, it’s a listed venture-capital fund – and equity investors are sometimes too impatient to wait for years for start-ups to realise gains.

Yet the Delivery Hero sale earned it 2.6 times its capital; another disposal earlier this year made a 20-fold gain.  Now that the group can afford to be generous, perhaps “a grander gesture” than the small buyback it’s already planning will “win [it] more stockmarket friends”.

City talk

• “Michael O’Leary is a lucky man,” says Nils Pratley in The Guardian. “Almost nobody is asking whether he is still the right person for the job.” The second round of cancellations at Ryanair will affect 18,000 flights on 34 routes, while the Civil Aviation Authority says the airline misled passengers about their legal rights.

O’Leary has been chief executive since 1994 and “his talent for publicity is undeniable”. But there hasn’t been much debate about whether the airline operating model generates risks, such as a shortage of backup pilots. “Is it too much of a one-man show? You’d hope somebody in the City or Dublin would want answers.”

• Card Factory makes cards for most occasions. “Last week, it could have done with sending commiserations to investors saying ‘Sorry for your losses’ after its shares fell a fifth,” says Kate Burgess in the Financial Times. The company’s pre-tax profits slid 14% to £23m in the first half of the year to July.

Costs have risen owing to higher wages and a weaker pound, and the board is now reviewing “the amount and timing of future special dividends”, chief executive Karen Hubbard told investors last week. The extra payouts made Card Factory look different from peers. Now, investors “realise that Card Factory is very ordinary”.

• “Up pops Carillion with its half-year figures”, says Alistair Osborne in The Times, but it says nothing about rumours of a takeover by a Middle Eastern company – the story that “drove the bombed-out shares up 38% in two days”.

Where has the Financial Conduct Authority been? It’s responsible for the UK Listing Authority, a body supposed to ensure there is no false market in company shares. “Well, it looks to have been a bit false now.” Fifty-two million Carillion shares changed hands in two days – twice the volume of the previous seven.