H&M on Tuesday reported that its first quarter pretax profits plunged to 1.26 billion kroner ($153 million as of Tuesday) from $3.21 billion in the year-ago quarter, driven down by "weak sales development as well as higher markdowns."
Overall sales in the company's top ten markets in the quarter fell 1%, and H&M U.S. sales fell 11% (or fell 1% in local currency). Also in the quarter, online sales for the H&M group rose by approximately 20% from the year-ago quarter. Total sales for the company's new brands rose by 15%, according to a company press release.
Gross profit in the first quarter fell to 23.04 billion kroner ($3.8 billion) from 24.47 billion a year ago, corresponding to a gross margin of 49.9%, down from 52.1% last year. Markdowns in relation to sales increased year over year by just over 2% in the quarter, partly caused by imbalances in the H&M brand's assortment, the company said.
H&M CEO Karl-Johan Persson on Tuesday blamed unusually cold winter weather for exacerbating a huge pile-up of inventory in the first quarter, which forced the retailer to drastically reduce prices. That in turn impeded the fast fashion retailer's efforts to right its merchandising.
"[O]ngoing initiatives are giving good indications and results, even though they have not yet been implemented at a large enough scale to have a decisive effect on the overall results," he said in a statement.
The company is staking much on the rollout of new brands, although analysts in the past have worried that those new banners, which include Afound and millennial-focused Nyden, as well as last year's Arket, are too small to have much impact on sales. In the first quarter, excluding franchise, the group opened 32 stores and closed 34 stores, for a net change two closures. As of Feb. 28, H&M had 4,743 total stores, down from 4,393 a year ago.
In his statement, Persson pleaded for some faith and patience over the long haul.
"Our assessment remains that sales for online and new business will grow by more than 25% during the year, and that the H&M group will achieve a somewhat better result," he said. "We take a long-term view that together with our knowledge and experience enable us to navigate through times such as this."
In the U.S., any slowdown at H&M leaves an opening for off-price retailers and the likes of Target, Amazon and Walmart, which have introduced a series of apparel private labels for women, men and kids that are getting the attention of value shoppers.