H&M will have a new store that's even cheaper than its normal one — and it could be a sign of trouble

  • H&M reported its biggest sales drop on record in the fourth quarter of 2017.
  • The store is known for its clearance sections full of discounted items. It is now launching an off-price store in Sweden to get rid of excess inventory.
  • The company is increasingly losing to fast-fashion competitors like Zara and ASOS, which have sped up their supply chains to stay on top of trends.

 

H&M is launching its own off-price store.

The new store, called Afound, opens in Sweden online and in stores later this year, the company said. It will be selling products from H&M and its other brands, such as & Other Stories and Cos, at discounted prices. It will also stock products from external brands. 

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The store is being marketed as a way to cash in on the off-price market, which is currently one of retail's few sweet spots. Macy's and Nordstrom have already adopted similar tactics and are ramping up the focus on their off-price stores, Macy's Backstage and Nordstrom Rack, which mimic TJ Maxx in their selection. 

The difference here is that H&M is not offering designer products at discount prices like an off-price retailer such as TJ Maxx does. H&M is offering its own products at a discount, and therefore could be using this new brand as a guise to shift unwanted stock.

H&M did not confirm to Business Insider whether it has plans to open these off-price stores in the US, but CFO Jyrki Tervonen told Drapers that the company would be looking at international markets in the future. The UK is likely to be the first, he said.

The company has struggled recently. Growth at H&M started to falter in 2016 and continued throughout 2017, culminating in its biggest sales slump on record in the last quarter of 2017. Between September 1 and November 30, sales decreased by 4% across the group. As a result, the company share price dropped by 10% in Stockholm Wednesday.

This is also partly because it is losing out to fast-fashion rivals such as Zara. H&M was once considered the king of fast fashion but is now falling behind competitors that are able to bring a product from concept to store in as little as a week. It takes H&M up to six months to do the same. This prevents the store from staying on top of trends, which can result in leftover inventory as fashion-conscious customers head elsewhere for the latest designs. 

As a result, heavily discounted clearance sections have become a common feature of its stores.

In the company's third-quarter results in 2017, CEO Karl-Johan Persson blamed lower profits on aggressive sales, but said these sales helped to clear inventory and put the store in a good position for the next quarter. But when Business Insider visited one of H&M's stores earlier in January, its sprawling clearance section told a different story.

Constant clearance racks debilitate the brand image in the eye of the consumer and make it seem less appealing. 

The new Afound store, on the other hand, could be a way for H&M to get rid of old inventory and improve the experience of shopping at its main stores. Still, Tervonen pointed out that H&M does not see the new off-price store as a bargain basement, but instead as an area of growth for the brand.

"The main idea is to bring something new to the off-price market, which is huge and growing," Tervonen told Drapers. "There is a great opportunity for Afound to take a big part of [the market] with a well-curated and wide assortment. It will offer stylish product and great deals."

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