Fast fashion, which is the mass production of fashion trend-right products at inexpensive prices, may have to deal with something it is not used to; excess inventory. Typically, the business model calls for many styles shipped frequently to stores, allowing for the trend-right merchandise to have a high sell-through, minimizing markdowns and improving profit margins. The industry inventory turnover for fast fashion is over 4.0 which is considered healthy for apparel stores.
Factors impacting the industry are closed stores and a shift in consumer mindset.
However, with many stores closed for at least a few weeks, the inventory is not selling at the same pace and it is unlikely that e-commerce sales can make up the loss in revenue. Once the inventory has passed the prime time to sell, the goods are typically marked down. Two of the largest retailers in fast fashion, H&M and Inditex (Zara parent company), both have a majority of their stores closed due to the coronavirus pandemic. H&M, serving 74 global markets, has closed 3,441 stores out of 5,062 while keeping about 50 online digital markets open according to the latest press release. Zara reported 51percent of its 7489 stores temporarily closed and 156 online markets which continue to operate. Although online sales for Inditex grew 23 percent in 2019, the total online sales represent only 14 percent of total sales. H&M’s online sales increased by 24 percent for 2019 but represent a small portion of the total revenue.
WSJ reported Zara’s app use and H&M’s app downloads both fell 14% in the U.S. markets. Groceries and staple items are top priorities for consumers today, so discretionary spending has been held back. Also weighing on consumers’ minds is the uncertainty of employment and a possible recession which means fast fashion may take a back seat for the near future. The fast fashion industry has been suffering from declining profitability and will be further challenged with added markdowns and excess inventory in 2020.
The board of directors steps up in reducing dividend payouts
The board of directors for each company is stepping up, having made clear statements about dividend payouts for 2019. H&M’s Stefan Persson, chairman of the board, stated, “In light of the current situation and the uncertainty about market developments, the board is proposing to the 2020 annual general meeting that no dividend is paid.” On March 18, the board of directors of Inditex stated, “In view of the current uncertain situation due to the Covid-19 pandemic, it considers that it is not the right moment to take a decision on the dividend to be proposed relating to FY2019.” The company is deferring the dividend payout decision until July.
Even with no dividend payout or deferred payout decisions, both companies will need to make tough choices in the near future in terms of reducing expenses as a result of lost revenue. Inditex noted sales decreased 24.1 percent from 1 March to 16 March 2020.
Strong financial performance in 2019 and flexible business model may help
Expense reductions may come in terms of employment (temporary and/or permanent layoffs, wage reductions, benefit reductions, etc.), adjusted inventory levels and closures of unproductive stores. H&M and Inditex had strong financial performances for 2019 which positioned the companies to be in a better position to react to current market conditions. Inditex stated that approximately $319 million inventory provision, a write-off for the existing inventory that will not sell at market value, was taken in the fiscal year 2019 in response to current market conditions and to minimize negative 2020 financial results due to unsold inventory. Net profit for 2019 would have increased 12 percent without the provision, instead, Inditex reported a 6 percent net profit increase over the previous year.
In China, H&M did reopen 500 of its 516 stores and Inditex stated the supply chain is operating as normal. While H&M operates the business model with more reliance on third-party suppliers, Inditex is vertically integrated and has a more flexible business model.
Beyond the company financials
Achieving financial goals for 2020 may be more challenging, however, H&M has been looking at ways to help on a broader scale which will resonate with the consumer markets. Helena Helmersson, CEO of H&M, reached out to the EU to understand its needs to address the pandemic and to offer help. The company immediately started to prepare for the production of personal protective equipment for healthcare providers. Anna Gedda, head of sustainability, H&M Group, stated, “The Coronavirus is dramatically affecting each and every one of us, and H&M Group is, like many other organisations, trying our best to help in this extraordinary situation. We see this as a first step in our efforts to support in any way we can. We are all in this together and have to approach this as collectively as possible.”
Economics, social environment and sustainability will impact the future of fast fashion
The consumer mindset has shifted in the U.S. from apparel purchasing to other product categories and more consumers are placing their dollars in companies that have sustainable practices. As the fast fashion industry has been criticized heavily for the impact of product production on the environment, both H&M and Zara have strived to improve the product life-cycle to a more sustainable practice. However, it’s possible that in the current crisis environment sustainability will become even more important to consumers, further alienating mass-market apparel shoppers. Even in normal times, fast fashion is inherently a difficult business to predict because trend-right fashions have a very short shelf-life. With the current down-turning economy, socially restrictive practices and sustainability mindset, forecasting becomes even more challenging.