Despite a series of widespread markdowns, clothing chain H&M is struggling to sell off $4 billion in extra merchandise — including months-old Halloween costumes and Christmas sweaters — as changing consumer tastes and increasing competition take their toll on the Swedish retailer.
“The rapid transformation of the fashion retail sector continues,” H&M chief executive Karl-Johan Persson said in a statement. “The start of the year has been tough. Weak sales combined with substantial markdowns had a significant negative impact on results in the first quarter.”
A confluence of factors have led to H&M’s troubles, analysts say. Chief among them: Millennials are growing up and are more interested in buying well-made clothes than in buying cheap items. There is also more competition from companies like Zara, Topshop, Uniqlo and Asos — all of which customers tend to associate with higher-quality clothing and better websites, according to Milton Pedraza, chief executive of the Luxury Institute, a New York-based market research firm.
“Millennials are looking for quality over quantity, which means they no longer want throwaway products,” Pedraza said. “They care less about fashion and more about classic and quality, neither of which H&M has been able to deliver.”
The recent backlash over an H&M ad showing a black child wearing a “coolest monkey in the jungle” sweatshirt could also have hurt sales, analysts said. There were widespread calls for customer boycotts after the January incident, and musicians The Weeknd and G-Eazy, both of whom had partnerships with the retailer, announced they would cut ties with the company.
“Whether an oblivious oversight or not, it’s truly sad and disturbing that in 2018, something so racially and culturally insensitive could pass by the eyes of so many (stylist, photographer, creative and marketing teams) and be deemed acceptable,” G-Eazy wrote on Instagram. “I can’t allow for my name and brand to be associated with a company that could let this happen.”
H&M has since apologized for the ad, but some in the industry say the company could feel far-reaching effects.
“There was a huge backlash, particularly in places like South Africa, that could’ve left some customers saying: ‘You know what? I wasn’t that loyal to H&M anyway. Maybe I’ll shop somewhere else,’ ” said Tasha Lewis, a professor of fashion design management at Cornell University.
In the most recent quarter, H&M said inventory rose 7 percent to a record $4 billion. On Tuesday, the company’s website was promoting “further markdowns up to 70 percent off.” Many items were clearly months old: Halloween-themed T-shirts were selling for $3.99, while infants’ Santa outfits were discounted to $4.99.
Excess inventory has plagued a number of traditional retailers in recent years, as customers increasingly shop online and look to start-ups for more unique clothing. Several chains, including Macy’s, Kohl’s and Nordstrom, pared back on holiday inventory last year, hoping to avoid having to offer deep discounts on leftover merchandise. The plan seemed to work: Retailers posted their most successful holiday performance in years, and many said they did not have to resort to huge markdowns.
“We maintained a healthy inventory position, which meant we did not need additional discounting to clear inventory,” Jeffrey Gennette, chief executive of Macy’s, said in a recent call with analysts. “We were disciplined with our promotions.”
That, however, wasn’t the case at H&M. As the world’s second-largest clothing retailer (behind Inditex, which owns Zara), analysts say, the company is particularly susceptible to the whims of consumers. H&M’s quarterly sales began falling late last year.
“There is a massive clash between customers’ expectations and what companies are delivering,” said Andreas Inderst, an analyst for the Macquarie Group in London. “This is an industry-wide issue, but for H&M it has become a particularly pronounced problem.”
Company executives, meanwhile, say they’re planning further discounts in the second quarter, as they look to turn around H&M’s business. The company is also preparing to introduce an “off-price marketplace,” called Afound, that will sell discounted items by H&M, as well as other brands.