H&M, Zara closes the store locations to get ahead

Europe's fast fashion giants may have been slow to wake up to the threat of e-commerce, but it seems more and more they have lifted their game enough to survive – and maybe even flourish.

Hennes & Mauritz, the Swedish company behind H&M, Monki and Weekday, and Spain-based Inditex (owner of Zara and Massimo Dutti), both see the benefits of decisions made last year to trim their networks with physical stores and Throw more resources on online sales. [19659002] A year and a half ago, H&M was still struggling with another makeover of its online store, and apparently hell bent on opening more stores that would never pay for themselves. Fast forward to this summer ̵[ads1]1; a storm for equities – and H&M has managed to hold on to its 15% gain as it announced its last quarterly earnings at the end of June. The results were remarkable for two reasons: one, their summer collections arrived with a bang, and sales increased 12% from the previous year; Second, it said it expected to refurbish unsold inventory for the fourth consecutive quarter, and predicted it would continue to fall through the end of the fiscal year. Shares are now up one-third from the 14-year low they hit in August.

  Inside an H&M store in Budapest
An employee arranges clothes at an H&M in Budapest, Hungary. The fast fashion chain has pulled off an impressive 18 months of turnaround. (Akos Stiller / Bloomberg – Getty Images)

Akos Stiller – Bloomberg via Getty Images

A major factor in H & M's turnaround is the critical look it casts on the store's footprint. After closing about 140 stores last year, H&M has revised its store opening plans this year from net 175 worldwide to 130, and guidance for continued "optimization" of the store portfolio's hints for further cropping. (A company spokesman declined to say whether the targets would see more revisions given the ongoing global downturn.) CEO Karl-Johan Persson told investors that some openings could be delayed while the company waits for more acceptable rents. More immediately, it reduces overcapacity in Europe, with a net reduction in H&M branded stores across the continent this year.

Meanwhile, Zara parents Inditex saw their global store cantry triple to nearly 7500 under former CEO Pablo Isla. Although some of this reflected a valuable diversification of the group's portfolio to include exclusive Massimo Dutti and youth focus Bershka, the expansion left it at many stores that could not pay for the e-commerce age. Isla responded by closing 355 stores last year, 76% more than it had originally planned. This year under new CEO Carlos Crespo, the company will close another 250 while opening 300. Inditex did not respond to a request for comment.

  Doorway of Zara store in Shanghai
At one time the store number of Spanish retail giant Inditex reached almost 7,500 worldwide. (Alex Tai / SOPA Images / LightRocket via Getty Images)

Alex Tai – SOPA Images / LightRocket via Getty Images

But despite store closures, both H&M and Inditex are still in growth mode in bricks and empire. Mortar with net store numbers is expected to increase this year at both chains. It is sensational for a year when, according to Coresight Research, US retailers have already announced more store closures than they did throughout 2018. The industry, including home-made icons such as Gap and Abercrombie & Fitch, has announced some 4,500 net store closures so far in 2019 (and over 7,500, not adjusted for new openings). For the whole of 2018, net closures were only 2,600.

The two companies' plans for online sales this year are even more striking. (A bold approach may be deserved, given that both companies report online sales, which are still less than 15% of total sales. In comparison, about 27% of US apparel sales are online.) Inditex has already opened online stores this year in Saudi Arabia, the United Arab Emirates, Lebanon, Egypt, Morocco, Israel, Serbia and Indonesia (serving a total population of nearly 500 million), and plans to have stores underway for the autumn and winter collections in South Africa, Qatar, Kuwait , Bahrain, Oman, Jordan, Colombia, the Philippines and Ukraine (a further 275 million).

"We want to make our fashion collections available to all our customers, no matter where they are in the world," Isla said in May, "even in the markets that currently do not have our bricks and mortar stores."

  Shoppers have Zara bags in the UK
As it fine-tunes its physical footprint, Inditex is rapidly expanding its online presence. (Jason Alden – Bloomberg via Getty Images) [19659006] Jason Alden – Bloomberg via Getty Images

Meanwhile, H&M promises major upgrades to its online store, including H & M's improved navigation and product presentation and shorter delivery time (especially the latter is an area where it has compared unfavorably to online rivals such as Zalando, Boohoo and of course It also promises more flexibility in payment, and builds on the investment in fintech unicorn Klarna last year.

Admittedly, the lines of corporate management charge their fees. H&M is likely to report declining profits this year due to high investment costs, and it had to increase its loan to fund dividends last year. Following a dividend increase earlier this year, Inditex now pays out 80% of its annual shareholder profits, which is uncomfortable with arguments from Morgan Stanley analyst Geoff Ruddell that the company has used some unclear – albeit legitimate – accounting methods to provide a flattering account of profitability over the past four years.

Still, with a market value of 85 billion euros, Inditex empire Amancio Ortega, the richest trader on earth, is likely to survive an error or two. Persson's H&M also seems to have the worst behind it. Many other retailers would like to boast just as much.

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