H&M struggles to reassure investors as store sales sag

By Anna Ringstrom and Helena Soderpalm

STOCKHOLM (Reuters) - Sweden's H&M <HMb.ST> cautioned on Wednesday that sales from its existing stores would continue to fall this year even as booming ecommerce should help lift earnings.

After decades of rapid expansion, the world's second-largest clothes retailer behind Zara owner Inditex <ITX.MC> has seen sales growth stall in recent years as it has struggled to adapt to the shift online and fend off increased competition from other budget brands.

A secretive company controlled by the family of Erling Persson who founded it in 1947, H&M held its first-ever capital markets day on Wednesday in a bid to reassure investors, stung by the more than halving of the share price since March 2015.

"We understand the need to be more transparent," Chairman Stefan Persson, the founder's son, told investors assembled in Stockholm. "Especially since we have had a challenging year ... where we have underperformed both against our own plans and of course market expectations."

The stock was down 5.5 percent by 1420 GMT, increasing its discount to Inditex, which was up 0.3 percent.

"Some had hopes for at least some like-for-like sales growth in 2018, but no,” said one fund manager, who declined to be identified.

H&M forecast growth of at least 25 percent in online sales and in its new brands such as COS and H&M Home in 2018, but said sales from existing core H&M brand stores would fall further, noting a tough start due to high stock levels and problems with its ranges.

By contrast, Inditex said sales increased 13 percent at constant exchange rates between Nov. 1 and Dec. 11.

HEAVY INVESTMENT

H&M has invested heavily in digitalisation to catch up with the likes of online-only players like ASOS <ASOS.L> and Zalando <ZALG.DE>. It now offers ecommerce in 43 of its 69 markets, while Inditex is online in 45 of its 94 markets.

However, Inditex has a more flexible supply chain that has allowed it to better integrate its stores and websites than H&M, enabling in-store deliveries and returns of online orders that its Swedish rival has been slower to introduce.

CEO Karl-Johan Persson said a key priority was now the core budget H&M brand, which accounts for the bulk of sales but which has seen the number of visitors to its stores shrink.

"Most important is to develop the range which we haven’t improved enough, to lift the store experience to a new level - there we haven’t improved enough - and to develop the online store and connect the channels," he told Reuters.

"(We need) to really understand the customers, their behaviour and expectations, and make sure we deliver the best offering and experience for them," he said in a presentation.

Head of business development Daniel Claesson said the customer experience would improve helped by more enticing store formats, better services and more interactive content online, adapting store offerings to local demand, personalised marketing, faster and more flexible delivery options, and a more flexible supply chain.

Portfolio manager John Hernander at Nordea, a top-10 H&M shareholder, said: "Given the negative surprises in the past quarters, H&M probably needs to show that the trend has changed before the stock comes into a positive trend for real, but the information today signals a more forward-looking H&M."

H&M said it expected "somewhat better" pre-tax earnings for the 2017/18 financial year. Analysts had been expecting a pre-tax profit of 19.9 billion Swedish crowns this fiscal year, according to Thomson Reuters I/B/E/S, down from a 20.8 billion crown profit in the 2016/17 fiscal year.

H&M said it expects physical stores to return to comparable growth from 2019 onwards, with considerably lower price markdowns, although there could still be a "slight increase" in markdowns in the 2017/18 fiscal year.

It also forecast online sales of 75 billion crowns ($9.4 billion) in 2022, up from 29 billion in 2016/17, and new brands to achieve sales of 50 billion in 2022, up from 17 billion in 2016/17.

"Overall, this is expected to lead to good increases in profit," CEO Persson, the founder's grandson, said.

The group disclosed for the first time that its online channel accounted for 12.5 percent of total sales in 2016/17, but 22 percent of operating profit.

It said it expected newly opened stores to increase group sales by between 1 and 3 percent in the 2019 to 2022 period.

($1 = 8.0056 Swedish crowns)

(Reporting by Anna Ringstrom and Helena Soderpalm; Additional reporting by Johannes Hellstrom; Writing by Niklas Pollard and Emma Thomasson; Editing by David Holmes and Adrian Croft)