H&M Is More Popular Without Discount?

H&M Hennes & Mauritz AB (HMb.ST) Haines Maurice group (H&M group) continued to improve the positive price sales help, gross profit margin recorded again after two years of growth, the profit decline is far less than the market expectations.

H&M Hennes & Mauritz AB (HMb.ST) surged nearly 16% to 163.8 Swedish Krona on Friday morning, indicating that investors have finally been convinced that the fixed exchange rate sales of the second global garment retailers have been growing for three consecutive quarters.

In the middle of this month, H&M group has taken the lead in disclosing that net sales rose by 10.5% to 51 billion 15 million kronor in the first quarter of fiscal year 2019 as of February 28th. The increase was 4% based on local exchange rate, excluding 6% of the largest market. Management pointed out today that the proportion of positive price sales continued to improve after product improvement. The group also introduced more low-priced products to avoid future promotions. The discount rate was therefore reduced by 150 basis points compared with the same period last year. In addition, the market share increased.

Gross profit margin increased slightly by 10 basis points to 50% in the first quarter, while the market is expected to fall to 49.4% from 49.9% in the same period last year. The last gross margin improvement will be traced back to the first quarter of fiscal year 2017. Pre tax profits fell 17.4% to 1 billion 43 million Swedish kronor over the seven consecutive quarters, with quarterly profits falling to the lowest level in the past 18 years, but still far ahead of the market forecast of 6.78-7.08 billion kronor.

Analysts believe that the distribution and return mail free strategy of the H&M brand member scheme oppresses the group's profits. The Group CEO Karl-Johann Persson said at today's conference call that it would consider adjusting the scope of the free mail service for more than 35 million H&M members. He also pointed out that free mail was welcomed by customers and promoted sales. Therefore, the group is committed to improving the profitability of e-commerce business from accelerating other aspects of efficiency such as warehousing automation.

Karl-Johann Persson also mentioned that the adverse floating rate of exchange rate is pushing up procurement cost.

The Group expects that the discounted sales in the two quarter will drop further, while the global sales growth at local exchange rates has accelerated to 7% in the two quarter ended March 27th. However, when Karl-Johann Persson was asked by analysts to predict the sales trend in 4 and May, he looked relatively cautious: "the market is still unstable, and we are still in the spanition stage, but we believe that we will gradually improve."

In the seven major markets of the H&M group, the United States, France, Sweden and Italy all showed significant speed increase in the first quarter, of which the second largest markets reversed negative growth; the third largest market maintained a 8% increase in the UK, while China recorded a 16% growth after the slowdown.

RBC Capital Markets plus Huang capital market analyst Richard Chamberlain estimated that the group's same store sales had a "slight increase" last season. In today's latest research report, he forecasts that the pre tax profit for the fiscal year is expected to increase by 5%-10% over the current 15 billion 400 million kronor, and the pre tax profit of the group will be 15 billion 640 million kronor in the fiscal year.

It is worth noting that at the end of the first quarter, the group's inventory remained as high as 39 billion 968 million Swedish kronor, which was 5% higher than the same period last year. The proportion of inventory between the 12 months and the net sales is still 18.6%, higher than that of the fourth quarter. Karl-Johann Persson stressed that the inventory situation was further improved than the four quarter. Most of them are clothing in the spring and summer. When it comes to the target level of inventory sales than when it will be reduced to 12%-14%, he said that he could not provide a timetable.

As of February 28th, H&M group has 4958 stores in 71 markets, a 215 increase over the same period last year. Management has maintained the goal of adding 335 stores and closing 160 stores throughout the year. The number of outlets in the European market will be higher than the number of stores opened. Stefan Persson revealed that the number of stores next year will remain at the 50 stores this year, and the strategy of local contraction may continue to 2025. H&M brand plans to open 240 new stores this year, most of which will avoid mature markets such as Europe and the United States.

The group's online sales now cover 47 markets, and will expand to Mexico and Egypt this year. H&M brands will also enter India's two largest e-commerce platforms, Myntra and Jabong, all of which belong to Flipkart, the largest online retailer in the country. Since its entry to India in 2015, the H&M brand has established a sales network of 41 stores in the local market, and has sold 1 billion 400 million Swedish kronor (US $140 million) in the 2018 fiscal year.

Karl-Johann Persson said in its earnings report that with the successful upgrading of the German online platform, all markets now have new platforms, which help integrate physical stores and online stores, and provide faster and more flexible delivery services to customers. He told analysts that the group's goal is to complete the integration of digital channels and physical stores in all markets within five years.

In the first quarter, the online sales of local exchange rates increased by 10% year-on-year, excluding the German business, which increased by 27%. Sales of new business sectors including brands such as Other Stories, Arket and Afound also increased by 17% based on local exchange rates.

H&M Hennes & Mauritz AB (HMb.ST) reported a SEK 155 on Friday, narrowing to 9.6%. Analysts are vigilant that today's rally may be stimulated by the "empty tie", that is, the group's good performance and the promotion of stock prices forced short investors to force their positions to close, resulting in a further surge in share prices. Since 2019, the stock has recorded an increase of 22%.