H&M buys less, buys smarter to deal with clothing backlogs

H&M shares jumped as the embattled retailer’s chief executive expressed optimism that he’s coming to grips with record apparel backlogs that have hit its profit.

H&M’s inventories have been a persistent problem, rising steadily as the Stockholm-based fast-fashion chain failed to keep up with consumers’ tastes and was struck by logistics woes. The company says it’s working through the excess stocks and will be able to scale back discounting as a result, even as it irons out its supply problems.

“We are in a better position now than we were last year,” chief executive Karl-Johan Persson said on a conference call Thursday. “We’re buying less and being smarter about our purchases.”

The shares soared as much as 13 per cent in Stockholm trading. Analysts at RBC Capital Markets pointed to H&M's forecast that fourth-quarter markdowns will be about flat with last year's, as well as a third-quarter gross margin that beat estimates.

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Short sellers

The stock gain was driven in part by a squeeze on short sellers, as these pessimistic investors rushed to cover their negative bets. About 29 per cent of H&M’s free float is shorted, meaning investors borrowed shares thinking their value would decline. The shares had lost more than a third of their value in the past year.

The results come as weakness among clothing retailers has pitted them in a battle to lower prices. Sales at Gap, discount clothing retailer Primark and Hong Kong-based Esprit have been under pressure, and Zara parent Inditex reported its weakest sales growth in four years this month.

Online sales were another bright spot for H&M, rising 32 per cent, though the retailer still may struggle to reach its target for a full-year increase of at least 25 per cent because first-half e-commerce missed that level.

“There can be a cannibalisation between online and stores, but they can also complement each other,” Mr Persson said on the call.

Market optimism

Charles Allen, an analyst at Bloomberg Intelligence, cautioned that Thursday's market optimism might be excessive. He pointed out that at this time last year, Mr Persson said the company believed that a big summer clearance wouldn't need to be repeated.

H&M’s operating profit fell 19 per cent to 3.98 billion kronor (€386 million) in the three months through August, marking the 10th decline in 12 quarters. Analysts expected 4.16 billion kronor. Stock-in-trade rose 15 per cent to 38.7 billion kronor.

– Bloomberg