Tidying Up With H&M

Image source: Glory Cycles - Flickr, EloPaint, pzAxe, Sergei Kardashev, evrymmnt - Shutterstock

What's going on?

Shares of H&M sparked joy on Thursday, rising 4% after the Swedish fashionista reported its first quarterly profit growth in two years. But investors also had a clear-out, sending British rival Ted Baker’s stock down 36%…

What does this mean?

H&M’s wares stayed on the racks for too long, meaning it had no choice but to discount heavily while also spending big on ecommerce – an ugly look for its earnings. But a few months ago investors started to see a glamorous change of style: H&M’s sales improved and, last quarter, so did its profit – which exceeded investors’ forecasts.

“Accessible luxury” rival Ted Baker, meanwhile, told investors – for the fourth time this year – that its annual profit wouldn’t be as high as hoped. It also reported falling sales compared to a year ago, as well as a loss in the last six months. “Unseasonable weather” aside (Ted Baker said September was warmer than it’d planned for), Ted’s floordrobe is now cluttered up with the same problems that had previously tripped up H&M: namely, competition from discount rivals.

Why should I care?

For markets: Customers are outgrowing Teddy. 

While retail’s shift to ecommerce shouldn’t surprise anyone, Ted Baker’s declining online revenue may still have taken some investors aback. That could mean customers’ once-favorite Ted risks getting sent to the charity store bargain bucket alongside the recently bankrupt Forever 21.

The bigger picture: Limited luxury options.

When faced with the prospect of slowing sales, true luxury brands – like jeweler Tiffany’s or Swiss watchmaker Richemont – look for new ways to polish up their profits or ramp up ecommerce. They rarely consider price cuts, which could risk sacrificing their reputation among customers. But that might be Ted’s best option: it’s currently stuck between high-end brands and cheaper online retailers like Boohoo. Cutting prices might win back some customers, but it’ll change the brand forever – posing quite a conundrum for the company’s newly seated CEO.

Originally posted as part of the Finimize daily email.

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