H&M shares tumble on surprise quarterly sales drop

By Anna Ringstrom

STOCKHOLM (Reuters) - Fashion chain H&M's sales fell unexpectedly in the past three months as it attracted fewer shoppers to its stores, sending its shares plummeting and underlining its struggle to adapt to a shift to online retail.

Shares in the world's second-largest clothing group have been on a downward slope since 2015 amid shrinking comparable sales. They fell another 15 percent on Friday to the lowest level since 2009, taking the year-to-date fall to a third. Trading volumes soared, with volumes at 2.5 times the 30-day daily average.

H&M said it would speed up efforts to adjust to changes in the market, including closing more H&M stores and opening fewer new ones, and start selling its core budget H&M brand through Chinese online platform Tmall..

"The quarter was weak for the H&M brand's physical stores, which were negatively affected by a continued challenging market situation with reduced footfall to stores due to the ongoing shift in the industry," the company said in a statement.

"In addition, there have been imbalances in parts of the H&M brand's assortment composition," it added, indicating issues with its clothing ranges. H&M has seen inventories pile up over the past two years.

Main rival Inditex, the owner of Zara, has outperformed H&M and others in recent years, helped by a more flexible supply chain that allows it to adapt more quickly to demand.

RARE SALES DECLINE

Fourth quarter sales shrank 4 percent year-on-year, or 2 percent in local currencies, to 50.4 billion crowns (£4.4 billion), in the three months to the end of November, lagging a mean Reuters poll forecast for a 2 percent increase, or 5 percent in local currencies.

It was the first time since at least 1998 that quarterly local-currency sales shrank, an H&M spokeswoman said.

In Swedish crowns, they have shrunk once before, in the first quarter of 2011. On an annual basis, sales have never declined since the company's public listing in 1974, she added.

Problems with product ranges appear to have compounded longer-standing issues over the move online.

"It looks like H&M's product offer has been very sub-optimal this season for what is now a more globally diversified company, and this will need to be addressed for investors to regain faith in H&M longer term," RBC analyst Richard Chamberlain, who has an "outperform" rating on the stock, said in a note to clients.

Spain's Inditex this week reported slower sales growth in the three months through October but said sales growth had gained pace again in November.

A string of analysts have lowered their ratings on the H&M stock recently amid concerns that H&M won't be able, despite rapid online growth, to keep up with newer and nimbler pure-online players such as Zalando and Asos, and that comparable sales declines will extend into 2018.

H&M's full quarterly earnings report is due Jan. 31 and the family-controlled and historically tight-lipped company will the following month host its first-ever capital markets day in an attempt to soothe investors.

"Fourth-quarter sales trends and potential further inventory build warrant caution for the full-year 2018 outlook. The CMD on 14 February may need to focus more on protecting the base rather than a blueprint for future growth," UBS analysts said in a note, with a "buy" recommendation on the stock.

($1 = 8.4353 Swedish crowns)

(Reporting by Anna Ringstrom, additional reporting by Johannes Hellstrom, editing by Keith Weir)