GLOBALES: Desperate H&M Hits the Bargain Bin to Solve its Problems - EntornoInteligente / Bloomberg / What do H&M shares and its new store concept have in common? They are both offering big discounts.

Hennes & Mauritz AB, which is grappling with the biggest drop in quarterly sales on record and shares that have fallen by about 40 percent over the past year, announced on Wednesday that it will introduce Afound, an outlet chain for its and other companies' excess stock.

A decision to use this format — Inditex had Lefties although this has now morphed into a broader value fashion brand — to clear items is an old trick. This is in stark contrast to the creativity infusing the company's other new brands, such as Cos, & Other Stories and Arket, which have sought to bring innovative retail concepts to main shopping streets.

The move is necessary. The flagship H&M brand hasn't solved the problem of how to shift stock that is stubbornly sticking around. Inventory rose 6 percent in 2017 to 33.7 billion kronor ($4.3 billion), the result of a warm autumn which left it with too many coats and sweaters. An added benefit from introducing the new brand is that it may also enable the company to turn some underperforming H&M stores into Afound locations. As tried as the off-price store concept is, the company is at least taking a creative approach to solving the problem.

It is not the only chain facing it – many retailers are finding that a constant barrage of discounts and special offers has made traditional end of season sales less potent. They have also conditioned consumers to only spend when they can get money off the full price. 

But a risk is that by also selling out-of-season garments from other retailers, Afound is entering an already-crowded marketplace. And the move comes as the company's financial flexibility is getting more stretched. Its net cash cushion — which stood at 25 billion kronor in 2010 — has disappeared. It has not cut its dividend, but the board is looking at offering shareholders the opportunity to take the payout in shares in order to conserve cash. The company denies that this is an act of desperation, but it's hard to think otherwise, particularly when it was so flush a few years ago.

Burn Baby H&M has moved from a net cash to net debt position

Source: Bloomberg

Net debt to Ebitda is currently zero, and the company said it would be comfortable with the ratio moving to one times. Bloomberg Intelligence analyst Chris Chaviaras estimates that this would enable the company to pay the dividend at its current rate for five years.

But add in the drain from too many store leases, the cost of closing outlets and the need to make significant investments in electronic commerce, and Afound might just spread resources too thinly.

While the parent company deserves credit for developing new concepts, as Gadfly has argued, the core H&M chain remains under severe pressure. The first quarter of 2018 has not started well. Plans to close 170 stores — close to half of the number of openings — looks sensible. It is likely that additions to the estate will come down in the future too. But H&M must go further. It needs to reinvigorate the core chain, sharpening both prices and styles and improving electronic commerce.

Store Goliath The number of H&M stores dwarfs the group's newer concepts

Source: Company reports

While other retailers could learn from H&M's imaginative new brands, right now, the company needs to be fully focused on solving its problems. After Afound, putting a break on its creative streak would be wise.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners. GLOBALES: Desperate H&M Hits the Bargain Bin to Solve its Problems

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