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H&M Investor Heads for Exit as Selloff Tests Crisis Point

H&M’s problems partly stem from its slowness to adapt to a digital age in which consumers increasingly shop online.

(Bloomberg)—One of H&M’s largest shareholders has lost its patience.

Skandia’s actively managed funds have spent the past months selling off most of its stake in Hennes & Mauritz AB after watching the fashion retailer struggle with weakening sales in its physical stores and intensifying online competition. The Swedish savings and insurance giant says there’s a raft of issues H&M would need to address before it will consider investing again.

“There’s so much they need to do that I don’t think they’ll solve this quickly," Erik Sjostrom, who oversees more than $3 billion as a senior portfolio manager at Skandia, told Bloomberg.

H&M, whose biggest shareholder is the billionaire Persson family that started the company in 1947, sank more than 30 percent last year. This year, the stock is down about 8 percent after falling 1 percent as of 11:34 a.m. in Stockholm on Monday, trading at the lowest levels since March 2009.

The world’s No. 2 fashion chain by sales (after Zara-owner Inditex SA) needs to start prioritizing profitability over growth and present a credible plan for tackling online competition, Sjostrom said. It also needs to cut its dividend, reduce the number of stores in mature markets and focus on getting its product mix and price levels right, as well as reducing or writing off excess inventory that gets in the way of new trends hitting its shelves, he said.

H&M has said it feels confident it can fix its “disappointing" sales history. Management is working on building its online presence, creating new brands, improving its shops and fixing inventory issues with better technology.

H&M’s problems partly stem from its slowness to adapt to a digital age in which consumers increasingly shop online. As recently as a year ago, its main target was to grow its physical store network by 10-15 percent annually. As it became clear more shoppers wanted to make their purchases online, H&M changed that goal to aim instead for annual sales growth of 10-15 percent, including online commerce. Its digital sales have increased, but H&M still faces stiff competition from multi-brand and free shipping platforms like Zalando SE and Asos Plc.

Analysts appear also to be losing their patience. Of those who provide their H&M ratings data to Bloomberg, 51 percent are now advising clients to sell the shares. That’s the most negative overall analyst view since at least early 2003, according to Bloomberg data. The average 12-month analyst price target has dropped to the lowest since early 2009.

Skandia’s funds, including its index-tracking funds, have sold a total of 1.26 million H&M shares in the past year and now hold 2.87 million shares, or 0.2 percent of the share capital (Skandia’s pension arm holds some additional H&M shares.)

Sjostrom said Skandia’s actively managed funds now have “almost nothing left” in H&M. The fund manager said he is unlikely to start buying again until H&M shows it understands the new market in which it operates, including the need to make products available at external online marketplaces.

“Why go to H&M, where you can only buy H&M? If you go to Zalando, you can buy a whole bunch of brands,” he said. “You need to be on these platforms.”

While H&M is working to address that issue in part by extending a cooperating agreement with Alibaba Group Holding Ltd.’s ’s Tmall in China, Sjostrom said that isn’t enough. Even if the company is growing online, it’s “still losing too much in stores,” he said.

The rise of low-cost retailers such as Associated British Foods Plc’s Primark and Fast Retailing Co.’s Uniqlo poses another problem. H&M virtually invented the business of low-cost, fast-fashion retail in the early 1990s, but is these days neither the fastest nor the cheapest brand.

“The market is changing very quickly, and H&M needs to figure out a new way to keep up with these developments,” Sjostrom said. “If they show how they’re going to fix it in a few years, then it could become an investment opportunity again.”

To contact the reporter on this story: Anna Molin in Stockholm at [email protected] To contact the editors responsible for this story: Christopher Kingdon at [email protected]; Eric Pfanner at [email protected] Niklas Magnusson, Tasneem Hanfi Brögger

© 2018 Bloomberg L.P

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