Despite slowing sales growth, H&M announces plans for new higher-end brand Arket
Gravlax and boiled potatoes, anyone? Faced with an ongoing lackluster performance in its brick-and-mortar stores, Hennes & Mauritz AB continues to diversify its portfolio with the reveal Thursday of a new brand dubbed Arket, which taps into a growing demand for minimalist, functional, timeless products — with a healthy living, Nordic-style café to boot.
Billed as a modern-day market, the label, with a focus on a broad range of essentials for men, women and children, spanning ready-to-wear and accessories, will be positioned in a slightly higher price segment than the H&M brand and more in line with the retailer’s COS format. Arket is to have an emphasis on materials, function and fit.
Speaking in a call with journalists and analysts on Thursday, Nils Vinge, H&M’s head of investor relations, said the Arket collections will go “from relaxed to well-dressed” and be hooked on classic items like “peacoats, trench coats and striped sweaters.”
Outside brands will also be a part of the mix, including footwear by Veja and Kickers and Peugeot pepper mills.
Regarding the targeted demographics for the label, Vinge said the group’s strategy as a whole aims at the “young at heart” from all age brackets.
Aside from riffing on “market,” the new brand’s moniker is also the Swedish word for “sheet of paper,” nodding to the blank page. “It both relates to our origin in the Nordic tradition of functional, long-lasting design and symbolizes the blank sheet, the sense of optimism and possibility we felt creating this new brand,” said Ulrika Bernhardtz, the brand’s creative director, in a statement.
In also offering a smaller, curated assortment for the home, Arket marks a shift in strategy for H&M, which earlier this year revealed that it was slowing store expansion and focusing instead on an omnichannel mix as its sales continued to lag behind key rival Inditex.
Focused on large cities in Europe to begin with, the first Arket store will open on London’s Regent Street in early fall, followed by locations in Brussels, Copenhagen and Munich. Based out of Södermalm, Stockholm, the brand’s collections will also to be rolled out on Arket’s e-commerce site in 18 European markets. Details for territories outside of Europe have not been disclosed
In terms of the planned door numbers for Arket, Vinge said that the COS brand, which launched a decade ago, has around 200 stores, and the & Other Stories format, which was introduced in 2013 and counts about 50 locations, “gives you a rough idea of the expansion plans.”
H&M’s move to diversify has potential, said Bernadette Kissane, apparel and footwear analyst at Euromonitor International. She explained that although the retailer’s namesake brand is positioned as a fast-fashion player, it in fact has a long-lead sourcing strategy. That means H&M is not as flexible as Inditex in terms of reacting quickly to shifting consumer trends and has resulted in the brand being hit by markdowns, she explained.
“It’s interesting. I think a lot of people were maybe expecting H&M to adopt a more flexible, agile sourcing strategy, but instead they’re taking on this more sustainable, conscious approach by introducing new brands tapping into this minimalist, health-conscious consumer that we’re seeing pick up pace,” she said, also referring to labels such as COS and & Other Stories.
“We’ve seen it with ath-leisure, but we’re starting to see it infiltrate other product categories,” she continued. “Then with the addition of third-party brands, it’s all about creating a very convenient shopping experience for the consumer, moving away from disposal fast fashion to a more convenient, streamlined concept.”
H&M’s shift to diversifying its portfolio isn’t a death knell for fast fashion, which accounted for 95 percent of the company’s retail revenues in 2016. Not for the time being, in any case. The retailer “still has huge potential in emerging markets,” said Kissane. However, she explained that in Western markets, “while I wouldn’t say fashion fatigue has set in, there is definitely a shift occurring where consumers are becoming a bit more conscious and are not so into buying products that you can wear for only one season. It seems like they’re moving in that direction.”
With COS and & Other Stories proving successful in terms of growth rates, though only generating a fraction of H&M’s overall business, the company’s direction with its new brands is quite forward-looking, according to Kissane. She said that the strategy is “maybe a little bit ahead of its time – and in the years to come could become quite successful.”
H&M currently counts seven brands in its portfolio, including H&M, COS, & Other Stories, Monki, Weekday, Cheap Monday and H&M Home.
“The interesting thing about Inditex and H&M is H&M’s portfolio is a bit more diverse,” said Kissane. “[Inditex-owned] Bershka, Pull & Bear and Zara are diversified in terms of the product they produce, but they’re still operating in the same kind of price segment and consumer base.”
Regardless of the long-term potential, H&M faces challenges in the short term and it was those hurdles that concerned analysts, who sent the retailer’s share price down 4 percent Thursday to 227.70 Swedish kronor, or $25.55 at current exchange.
On Thursday, H&M reported net profit in the first quarter dropped 3.5 percent, negatively affected by lower sales growth than planned amid tough market conditions in many of the retailer’s main markets as well as higher mark-downs.
Net income in the three months ended Feb. 28 fell to 2.46 billion Swedish kronor, or $274.5 million at average exchange. H&M’s gross margin, a key indicator of profitability, increased to 52.1 percent from 52.0 percent during the same prior-year period.
Despite the sluggish start to the year and aggregated market conditions that remain slightly negative, the group is maintaining its full-year sales guidance of 10 percent to 15 percent growth, according to Vinge. “But for sure, it will be more difficult given that the first quarter and March were much tougher than we expected,” he said. “There is the risk that if we don’t perform well enough in April and May we will have to make more aggressive markdowns.”
H&M’s bulging inventory has doubled over the past three years, despite the retailer’s aim of being able to sell more with less stock.
“It’s a balancing act. If you go too lean, you risk missing out on the top line. You have to be very cautious,” said Vinge, who dodged questions about H&M’s average lead times. Instead, he said: “I prefer to talk about reaction time, which is more important now in the shift to digitalization. The customers expect to get things now, in real time, and that’s why we’re very excited to now offer next-day, and sometimes same-day, delivery.”
H&M posted a 7 percent increase in first-quarter sales to 54.4 billion kronor, or $6.02 billion, as reported. In local currency, sales including VAT rose 4 percent, while sales excluding VAT amounted to 47 billion kronor, or $5.25 billion, an increase of 8 percent.
Company sales in March including VAT rose 7 percent, although the retailer said that March, April and May should be viewed together, since Easter and weather effects during this period affect the comparability of an individual month.
With physical stores shuttering globally in the wake of migration to online, H&M said it is still looking to seize on opportunities for prime retail locations, with 430 openings planned for 2017 despite the unfavorable first-quarter results.
“It’s not just about stores or online, it’s the combination. This is something we continue to develop. A lot of peers are closing down and leaving their stores, which of course opens up opportunities,” said Vinge. “But we’re talking about two things here because it’s mainly B- and C-level malls, and not so attractive locations that are closing down. But we are always in the best locations and there is still big demand for space.”
H&M debuted its first store in Kazakhstan in mid-March and in the first half of the year plans to continue its online rollout into six new markets – Turkey, Taiwan, Hong Kong, Macau, Singapore and Malaysia.
Meanwhile, four more new markets for physical stores are to be added this year, in Colombia, Iceland, Vietnam and Georgia. H&M Home will inaugurate its first freestanding store in 2018.
H&M is also looking to be more specific when it comes to buying and allocation assortment relevant to each store in a “much more advanced way than in the past,” said Vinge. “The advanced analytics are very exciting. With these new algorithms it gives us much better support to forecast the demand in a more precise way, which of course increases the chances of being even stronger in the top line and reducing markdowns.
“Digitalization is not just changing fashion apparel, it’s changing the whole of society,” continued the executive. “We know exactly where we’re going, and while we’re not yet there, we are taking the necessary steps.”
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