H&M's seams are tightening: these are the reasons why Zara increases its advantage

The Swedish company Hennes & Mauritz (H&M) was born in 1947 to sell women's clothing;

It grew with the mass and rapid production of clothing at affordable prices and now suffers from increasing competition from e-commerce giants such as China's Shein and Temu.

They are rivals that challenge the large traditional fashion chains with a powerful idea: buy like a millionaire even if you are not.

H&M earned 775 million euros in 2023 (8,753 million Swedish crowns), more than double that of a year before (316 million euros).

But these figures do not convince analysts and investors.

In six months, H&M's share price has fallen by around 16%, there have been announcements of closures - 28 stores in Spain - and changes in management have been approved to face a restructuring that the former CEO Helena Helmersson choked off. .

Elena Fernández-Trapiella Janssen, an analyst at Bankinter, explains that there was nothing to predict the change in management, announced on January 31, but the turnaround that the previous CEO wanted to give to the company has not materialized: “They have closed offices and improved efficiency, but margins remain below 7%.”

It is little, maintains the expert, if compared to its great rival, Inditex, which exhibits ebitda (gross profit) margins of 23%.

The hot topics in the cauldrons of the fashion group are excess inventories, which it tries to solve without too aggressive discounts, and adjustment to new modes of commerce.

They are fundamental tools such as the integration of physical and online sales of products or proximity supply.

The Swedish group, controlled by the family of founder Erling Persson (it has 45.5% of the capital), is, in many ways, a twin company of Ikea.

It was created in the same year, 1947, and, like the furniture manufacturer, expanded internationally due to its unconventional ideas about production, distribution and

marketing

.

A success story that takes shape in a network of 4,369 stores around the world - data from November 2023 -, 96 fewer establishments than a year before.

From its position as the second largest

fast fashion

chain after Inditex, H&M faces a challenge in which the future is at stake: how to build a powerful and efficient model to compete in terms of quality-price ratio as Inditex does.

Finding the right key is not easy.

H&M, despite everything, is confident.

“We have a solid business concept, where the key is our physical and digital stores and the opportunity to establish a direct relationship with customers.

In this high inflation environment, we believe that our offer to the customer with fashion, quality at the best price in a sustainable way, is more relevant than ever,” the group maintains.

But in the meantime, the gap with Inditex grows.

Discretionary consumption has suffered from inflation and rising rates, and, although it has affected all companies, H&M's numbers are poor compared to those of Amancio Ortega's company, which is growing at double digits.

A sample.

In the first nine months of 2023, the Swedish group's gross and net margins improved and reached 50.3% and 5.1%, respectively.

But in the case of Inditex they were 59.4% and 20.3% in each case.

All in a context in which sales have not recovered.

H&M's constant currency turnover fell 4% in the fourth quarter of 2023 and the start of the year has not been promising either.

The work ahead of the new CEO, Daniel Ervér (42 years old), who started in the group as an apprentice in 2005, is not going to be easy.

The objectives are to double 2021 sales in 2030 and recover an ebit margin – the percentage relationship between profits and business volume – of 10% in 2024 (compared to 1.3% in 2022).

Those goals seem difficult to achieve.

Restructuring is not easy because the potential for cost cutting has limits.

According to the group's report for fiscal year 2023—just published—“by 2024, the plan is to open around 100 new stores and close around 160, which will result in a net decrease of around 60 stores.”

Most openings, the document states, will be in growing markets, while closings will mainly be in established markets.

In Spain, all companies in the industry, including H&M, will have to refine.

The Swedish group already applied an agreed ERE in Spain three years ago that affected 349 employees.

Now it has proposed the dismissal of another 588 workers out of a workforce of 4,000.

A possible profile of a smaller group is drawn on the horizon.

All in a complicated context.

Will there be closures in Spain beyond the 28 announced establishments?

The company does not rule out anything.

“Our commitment,” its spokespersons point out, “is based on adapting and refining our store portfolio to meet the dynamic needs and expectations of our customers.

H&M Spain proposes to close 28 stores [out of a total of 130].

However, at this time, we cannot confirm other closures that may take place in the future.”

Price increase

Eduardo Zamácola, president of the National Association of Textile, Accessories and Leather Trade (Acotex), which brings together 800 companies and nearly 15,000 points of sale, is clear about the difficulties of the moment: “The consumer is exhausted by the rise in prices, "He buys based on promotions and prefers to spend on leisure rather than on fashion."

Zamácola has one good fact — the sector expects growth of 5% this year — and another bad one: the increase in business will still not compensate for the deep sales declines in 2020 and 2021.

The other major association in the sector (Asociación Retail Textil España, ARTE), which includes up to 40 major brands, led by the giants Inditex, H&M, Primark and Hugo Boss, is cautious about the evolution of the business while gathering data. latest data from the sector.

All the companies in the association know that competition from platforms like Shein or Temu is not going to disappear.

The pandemic changed citizens' consumption habits and that is not going to change.

Companies that do not know how to adapt are going to suffer.

Not everything is negative.

H&M maintains strong pillars.

As of November 30, 2023, according to the company, the total liquidity buffer, that is, cash and cash equivalents, plus unused credit lines, reaches €3.95 billion.

Everything will be insufficient to maintain the business and to adapt it to new demands, including, notably, environmental ones.

The textile industry is one of the most polluting on the planet.

The Swedish group has committed to halving emissions by 2030 and achieving a zero-emission impact by 2040. It will do so, it assures, with more sustainable ways of preparing, transporting and packaging products.

It won't be easy, but there aren't too many alternatives.

If the restructuring does not work, only cuts will remain.

The Nordics know that.

Its knife craftsmen invented the Scandinavian edge (scandi), sharp, simple and tremendously effective in cutting.

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