StockBeat: H&M, Inditex Hit Speedbumps on the Road to Recovery

This post was originally published on this site — Europe’s two biggest fast fashion groups confirmed an inevitable slowdown in their business on Tuesday as the winter wave of Covid-19 pandemic put the chills on store sales across much of the northern hemisphere.

However, both H & M Hennes & Mauritz  (ST:HMb) and Zara owner Inditex (MC:ITX) cast the development as essentially a mild disappointment on the road to a lasting recovery next year, with Inditex reiterating a dividend policy that includes the payment of a bonus dividend over the next two fiscal years.

Both had all-but managed to restore sales to pre-pandemic levels by the end of summer, but indicated they had faltered again in recent weeks, even though their online channels continued to flourish.

Hennes & Mauritz said that its sales slowed markedly toward the end of a fiscal fourth quarter that ran through November 30. In the first half of the quarter, sales had been down only 3% from year-earlier levels, but between October 27 and November 30, they were down 22% “as the recovery transitioned into a new slowdown,” the Swedish company said.

For Inditex, sales had returned to -6% year-on-year in October from a low point of -72% in April, but fresh lockdown measures across Europe and the U.S. meant that sales were 19% below 2019 levels in November and 13% below in the first 10 days of December. Things are likely to get worse from there, with Germany closing non-essential stores, London moving into ‘tier 3’ lockdown measures and Mayor Bill De Blasio warning New Yorkers on Monday to prepare for a full lockdown in the crucial period running up to Christmas.

The stocks of the two companies were reasonably relaxed. H&M stock fell 3.4% but are still up 24% since late October, when the rotation back into cyclical stocks began to crank up. Inditex stock fell 2.3% but is likewise up 26% since late October. The STOXX 600 eked out a 0.1% gain but remains essentially rangebound as the market waits for a resolution to the EU-U.K. trade talks.

Neither stock is cheap, with Inditex trading at 45 times trailing earnings and H&M at over 100 times, although that multiple is burdened by exceptional costs from a restructuring that the Swedish company has now largely completed.

However, both can make passable claims that they have used the pandemic to accelerate a structural shift that was necessary for both – away from expensive brick-and-mortar stores and on to the Internet. Inditex’s online sales were up 76% in year-on-year terms in the nine months through October and have sustained that pace of growth since, the company said.

In the case of Inditex, which put out the more detailed figures, pivoting to a more virtual model has gone hand in hand with a big increase in operational efficiency: it has managed to make do with 8% less working capital this year, and with 11% less inventory.

The next few weeks may still be rough on both, but unless the lockdowns continue long enough to affect the sales of spring catalogues, they are unlikely to be more than a couple of speedbumps on a road that becoming straighter and wider.