Budget fashion group H&M (>> Hennes & Mauritz) has slashed prices to shift unsold summerwear, in the latest sign the Swedish company is struggling to keep pace with rivals as young buyers move online.
Seemingly unstoppable for decades, H&M has been hit by tougher competition in the past couple of years from cut-price brick-and-mortar rivals. It is also trying to improve its e-commerce offering to counter new online-only players.
H&M entered its third quarter with higher-than-usual inventories that needed to be sold before autumn collections arrived. On top of that, overall demand has been sluggish in some of its key markets, such as Germany.
"The rapid shift from offline to online in the young value fashion market has been one factor behind disappointing sales trends in the past couple of years," said Societe Generale analyst Anne Critchlow, who has a "sell" rating on H&M's shares.
"In most countries, online is not yet integrated with the stores and free delivery and free returns are not available."
Sales at H&M, the world's second-largest clothing retailer after Zara owner Inditex (>> Inditex SA), reached 51.2 billion crowns (£4.72 billion) in its June-to-August financial quarter against a forecast 51.6 billion in a Reuters poll.
Local-currency growth was 4 percent, just below forecast.
H&M said the aggressive summer markdowns had led to an improved inventory position ahead of the fourth quarter and that autumn sales were off to a good start.
H&M's shares, which have tumbled from all-time highs near 370 crowns in 2015, were up 2.2 percent to 218.10 crowns at 1400 GMT.
The company has launched several independent and mostly higher-end brands in recent years to broaden its customer base in the face of growing competition in its budget segment, but the core H&M chain still accounts for the bulk of its sales.
H&M is also intensifying efforts to catch up with services offered by pure-online players such as Asos (>> ASOS plc) and Zalando (>> Zalando) as shopper behaviour and expectations transform even faster than H&M had expected.
It is now testing "click-and-collect" - picking up items bought online in stores - in Britain, and rolling out faster delivery options and online returns in stores in some markets.
RBC Capital Markets Richard Chamberlain with an "outperform" rating on H&M, said he expects sales and gross margin trends to improve next year helped by the online improvements.
(This version of the story refiles to clarify quote in paragraph four)
(Editing by Jason Neely/Keith Weir)
By Anna Ringstrom and Helena Soderpalm