H&M Defies Retail Gloom

As a purveyor of stylish clothing at reasonable prices, retail chain H&M looks at the economic slowdown as an opportunity to expand

With the credit crunch in full swing, retailers around the world are slashing prices and shuttering shops. But Sweden's Hennes & Mauritz (HMB.ST), a pioneer of cheap but chic fashion, is managing to buck the trend: opening stores, entering new markets, and adding new brands. "Our strategy is based on the concept of fashion and quality at the best price," says H&M Chief Executive Rolf Eriksen. "It helps us stay balanced even during economic downturns."

Defying tough times, H&M will enter one of the world's most competitive fashion markets with the opening of its first store in Japan on Sept. 13. The initial outlet, in Tokyo's Ginza shopping district, will be followed by a second store in Harajuku on Nov. 8. At the same time, H&M will also launch its latest high-profile design collaboration with Japanese designer Rei Kawakubo, the founder of cutting-edge fashion brand Comme des Garçons. A third Japanese store in Shibuya is expected to open next fall.

The fashion chain's arrival is bound to thrill members of its Japanese H&M fan club, who already number 20,000. "With H&M's track record in entering new countries, the strong interest in fashion in Japan, and the existing H&M fan club, H&M has a good chance of doing well there," says Erik Sandstedt, retail analyst at Kaupthing (KAUP.ST) bank in Stockholm.

A Global Expansion

Indeed, as a purveyor of stylish clothing for reasonable prices, H&M sees the economic slowdown as an opportunity to expand. With its entry into Japan, the company will boast more than 1,600 stores in 30 countries, including China, where it launched in 2007. Over the next year, the company plans to increase the number of its stores by as much as 15%, focusing expansion on the U.S., Europe, and Japan.

As economic conditions worsen, H&M, which leases its store sites, is finding it easier to secure prime locations at better terms, especially in the U.S., where the company now has 153 stores, mainly on the East and West coasts. "We're getting much better deals now that we are a known player in the U.S." says H&M's head of investor relations, Nils Vinge. "Landlords are approaching us."

How is H&M managing to thrive in what many observers call the toughest trading conditions in decades? Credit a relentless focus on costs that extends from the company's merchandise to its business model. For starters, H&M's average sale prices are lower than those of its main rivals, Spain's Zara, owned by parent company Inditex (ITX.F), and the Gap (GPS). This will enable the Swedish chain to gain "market share in the current downturn, as consumers trade down in search of better value," says Kaupthing analyst Sandstedt.

The Outsourcing Advantage

H&M's biggest advantage is its business model. A team of 100 in-house designers works with buyers to develop the clothing, which is then outsourced to a network of 700 suppliers, more than two-thirds of which are based in low-cost Asian countries. Not owning any factories, "H&M can be more flexible than many other retailers in lowering its costs," says Raphaël Moreau, retail company analyst for market research firm Euromonitor International in London.

So far, it has proved a lucrative formula. Operating profits for the year ended Nov. 30, 2007, were up more than 20%, to $2.8 billion, on sales of $11.9 billion, up 14.5% from the previous year. Brokerage Sanford C. Bernstein estimates that 2008 operating profits will grow by nearly 15%, to $3.2 billion, and sales will rise 12.6%, to $13.4 billion.

Hoping to fuel future growth, H&M has added a number of new brands to its portfolio. In March 2007 it launched its first new retail brand, called COS (Collection of Style), in London. The new chain, which has now expanded to 12 stores in major European cities, is more upscale and targets an older customer than the core H&M brand, offering apparel and accessories for men and women at higher prices.

A Huge Potential

Last year, H&M also made its first acquisition since the company was founded in 1947, taking majority control of Sweden's Fabric Scandinavien in May. The four-year-old company owned two hip Swedish properties: Monki, a 12-store chain aimed at teenage girls, and the smaller Weekday, whose six stores sell a mix of outside labels and house brands such as über-trendy Cheap Monday jeans (which are also sold through 1,000 other retailers including Barneys New York). Both chains are still small in size and limited to Sweden, at least for now. But there's huge potential to make the new businesses more efficient and expand internationally by having access to H&M's sourcing and logistics, says Vinge.

By experimenting with new brands, H&M is taking a page from the playbook of rival Inditex. The Spanish group, which recently overtook Gap as the world's largest fashion retailer by sales, owns seven different brands including its flagship Zara chain. Many analysts reckon it's an approach that offers the best opportunity for growth. "The multiformat strategy allows mass fashion retailers to cover a broader market space, both in terms of price points and fashion content," says Luca Solca, senior research analyst at Sanford C. Bernstein in London. The challenge for H&M will be sustaining it, no matter what happens to the economy.

Source: Business Week

Global Apparel Retailers Set Their Sights on U.S. Market

America's shopping venues are getting an international makeover as moderately priced apparel retailers from Europe, Asia and Canada increasingly set up shop in the U.S.

In coming to America, these retailers are following high-end European designers, who planted their flags in recent decades, expanding first to big cities and then to smaller markets. Now, more foreign retailers are taking advantage of the weak dollar, which reduces the cost of their initial investment, and favorable terms on store leases as landlords look for new tenants to attract shoppers as midpriced U.S. chains like AnnTaylor Stores Corp. and Talbots Inc. contract.

Sweden's Hennes & Mauritz AB, with 156 U.S. stores, calls the U.S. its "largest expansion market." Since the beginning of its fiscal year in December, the "fast-fashion" chain has opened 11 stores in the U.S., including its first store in Seattle on Friday. It plans about 27 more openings this fiscal year, including a store at Westfarms Mall in Farmington, Conn., in August.

Canadian yoga-wear retailer lululemon athletica Inc. plans to open 32 U.S. stores this fiscal year, almost doubling its U.S. presence to 66 stores. South Korea's Who.A.U, which is taking aim at Abercrombie & Fitch Co.'s Hollister chain, hopes to open 450 stores in the U.S. in the next 10 years. And Canadian teen retailer Garage hopes to have 500 stores in U.S. malls in seven to 10 years.

Also expanding in the U.S. are Spain's Zara (owned by Inditex SA) and Mango chains, Germany's luxury sport brand Bogner, Russia's Kira Plastinina, Iceland's Kisan, Japan's Muji and Britain's Topshop chain and Karen Millen brand. "There aren't too many important global apparel retailers that aren't looking at the U.S. market for its potential," says Ken Nisch, chairman of JGA, a Southfield, Mich., retail-strategy and design firm.

Opening shop in the U.S., of course, isn't a slam dunk. There's no guarantee that the economy -- or apparel sales -- will recover from the current slump any time soon. Furthermore, the U.S. is a low-growth market where retailers have long had to fight for market share. But "the U.S. is still the world's largest consumer market," says Christine Day, lululemon's chief executive. "Even if it contracts, it would be a mistake not to be in it."

The retailer, which is opening both urban and suburban locations, has been able to negotiate lease terms that are more favorable across the board than a year ago. The terms, which vary by lease, include fewer built-in rent increases, the option to terminate leases after three years rather than five years and higher sales thresholds before lululemon has to pay a percentage of sales in addition to base rent.

Many international retailers are approaching U.S. expansion cautiously. Muji and Topshop, which is set to open its first U.S. location in New York in October, plan to wait and see how their stores in New York perform before opening stores elsewhere. That's the lesson of Japanese clothing chain Uniqlo, part of Fast Retailing Co., which launched its U.S. operations three years ago with stores at three New Jersey malls. Last summer, Uniqlo closed the stores in favor of building brand awareness via the flagship store it opened in New York's SoHo in late 2006. A spokeswoman says the retailer is looking at further expansion in the U.S.

Foreign midtier retailers still account for only a small percentage of U.S. retail sales overall. Twenty-two foreign chains queried by The Wall Street Journal said they will operate about 475 stores in the U.S. by year's end. The U.S. had roughly 150,000 clothing and accessory stores in 2006, according to the latest government data. But the value of foreign retailers' investments in clothing and accessory stores in the U.S. continues to grow. Between 1997 and 2007, it rose more than 60% to $4.1 billion, according to the U.S. Commerce Department's Bureau of Economic Analysis, which released the most recent data Friday.

Furthermore, foreign retailers have had an outsize impact on the U.S. market. The invasion of fast-fashion chains like H&M and Zara has prompted U.S. retailers from Gap Inc. to J.C. Penney Co. to update their selections faster or more often.

Still, it is unlikely that the influx of foreign chains will offset American store closures that have pushed U.S. mall vacancies to 6.3% in the second quarter, their highest level since 2002, according to market-research firm Reis Inc. For example, over the next few years, AnnTaylor is closing about twice the number of stores lululemon plans to open in the U.S. this year.

International retailers "will provide some incremental demand for the better properties," says Rick Sokolov, president of Simon Property Group Inc., the largest U.S. mall owner by market value and number of properties. He says those most likely to benefit are top-tier malls in high-traffic urban areas generating the highest sales per square foot.

At many malls, developers looking for new concepts to excite shoppers are giving international retailers the deals traditionally reserved for top tenants. "These terms have always been there for the hot retailer, but historically the hot retailer was an American company," says Julie Taylor, senior vice president with real-estate-brokerage firm Cornish & Carey Commercial-Oncor International. "Now, more often than not, those are foreigners."

Source: Wall Street Journal