(Bloomberg Opinion) -- Hennes & Mauritz AB is a model retailer, but its pile of unsold clothes has been obscuring that fact.
On Friday, there were the first signs of that changing.
The company reported first quarter pre-tax profit that significantly beat the consensus of analysts’ expectations.
Sales rose 10 percent in local currencies in the three months to Feb. 28, and were up 7 percent in March. H&M had to offer less discounts to tempt shoppers, and expected this to continue in the current quarter.
It received a lift from much better weather in Europe this year than in 2018, when arctic temperatures swept the continent. The company has also improved its fashions and lowered prices, while expanding online and upgrading stores.
As I have argued, no retailer ever cut their way to growth. In an environment where consumers are cautious it’s easy to batten down the hatches. H&M has continued to invest in new concepts, such as Arket, a Nordic inspired store that includes fashion and home furnishings.
True, not all of these ideas will work. But the company is learning from them, and that’s already evident in some locations. A new H&M in the City of London has a fresh image that looks to have borrowed from Arket’s aesthetic.
H&M’s focus on sustainability is another positive, as millennial consumers embrace environmentally friendly clothing.
However much credit investors give the company for these initiatives, it still faces some considerable challenges. Competition from Associated British Foods Plc’s Primark is not going away any time soon. The retailer is about to open its biggest-ever store, located in Birmingham, England, and it is continuing to expand across the U.S.
Meanwhile, the value of H&M’s inventory rose by 14 percent to almost 40 billion Swedish kronor ($4.3 billion). This includes items from the current spring/summer season, which so far are selling well. Though H&M has made good progress offloading older stock, it will need a few months without any hiccups to make sure it isn’t left with too many utility jumpsuits and floral dresses.
What’s more, the external environment is becoming more difficult, as the U.S. dollar has strengthened. H&M sources about 80 percent of its products in Asia, likely paying in the currency, so any appreciation of the dollar is unhelpful.
The shares soared on Friday, and they’re now up about 27 percent from a year ago. They trade on a forward price to earnings ratio of about 21 times, on a par with Inditex SA.
That implies a successful turnaround is in the H&M carrier bag. It is not, so the current valuation could be a bit overdone. But there is no doubt that the perennial underperformer is finally going in the right direction.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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