By Helen Reid and Marie Mannes
LONDON (Reuters) – The new boss of H&M faces a thorny dilemma: increase prices and lose more ground to budget online fast-fashion rival Shein, or cut prices and risk profit margins falling short of target.
Daniel Ervér, 42, took the reins at H&M on Wednesday after Helena Helmersson quit in a surprise announcement that sent the company’s shares down more than 10%.
At the same time, H&M said sales continued to fall over the key holiday trading months of December and January, raising questions about how much revenue the retailer is sacrificing in pursuit of a higher profit margin.
“What we think they’ve been doing is raising their prices quite aggressively across different markets – obviously you can do that, and your volumes go down and your margin goes up,” said Bernstein analyst William Woods.
“The key question is, does H&M have the brand to charge much more than it does today?”
The Swedish fashion retailer, known for $19.99 jeans and dresses under $15, also sells leather trousers for more than $300 and, under its Cos brand, coats for as much as $1,190.
Shein, which sells $8 dresses, $5 t-shirts and $2 jewellery pieces, has eaten into H&M’s share of the lower-end of the market while bigger rival Zara dominates the upmarket end of fast fashion.
The challenge for Ervér will be to show that H&M can boost profit while returning sales to growth.
Although only thrust into the spotlight on Wednesday, Ervér has been at the company for 18 years and became CEO of the core H&M brand at the start of last year.
In an interview, Ervér said he wants to ensure H&M is “100% competitive”, including selling some higher-priced items.
“We have developed an extended range of elevated products where we raised the quality,” said Ervér. “We see a very big interest in products with a wider price range than what we were offering before.”
In its full-year report, H&M said sales at its more upmarket brands including Cos, Arket and Weekday were strong and contributing more to profitability.
As it aims for a 2024 operating profit margin of 10%, H&M said it had achieved 7.8% in the fourth quarter of 2023, down from 7.2% in the previous three months but well above the year earlier 1.3%.
“Protecting the margin is more important than maximising volumes – so the strategy is slowly working,” said Adil Shah, portfolio manager at Storebrand in Oslo, which holds H&M shares.
Falling inventories will also enable the company to increase prices, he said. H&M’s inventory levels as a share of 12-month sales fell to 15.8% by the end of the fourth quarter, from 19% a year ago.
Karl-Johan Persson, H&M chairman and grandson of founder Erling Persson, said the company is also investing in improving value for money, increasing the quality of products while maintaining or lowering prices.
Persson, whose family holds a 51% stake in H&M, said last year’s focus was on cost control and inventory management but this year more emphasis would be put on increasing sales.
H&M has been closing stores and laying off staff, most recently announcing it would shut more than a fifth of its stores in Spain and lay off as many as 588 workers.
Although Ervér is little-known to the investor community, Storebrand’s Shah said he prefers a CEO who knows the business well.
“I applaud the courage to choose someone who does not necessarily have the track record as CEO, but clearly has the knowledge required,” he said.
(Editing by Matt Scuffham, Kirsten Donovan)
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