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H&M, a Fashion Giant, Has a Problem: $4.3 Billion in Unsold Clothes

The scale of the problem illustrates H&M’s vast size — as one of the world’s largest clothing manufacturers, it produces hundreds of millions of items each year. There are so many that a power plant in Vasteras, the town where H&M founded its first store, relies partly on burning defective products the retailer cannot sell to create energy.

Analysts have been pressing Karl-Johan Persson, the company’s chief executive, over the issue. Inventory levels were up, Mr. Persson said, because H&M was opening 220 new stores and expanding its online e-commerce operations, and so needed to fill the racks.

Critics, however, blamed poor inventory management and underwhelming product offerings, prompting once-loyal shoppers to take their wallets elsewhere.

H&M, a Fashion Giant, Has a Problem: $4.3 Billion in Unsold Clothes
H&M, a Fashion Giant, Has a Problem: $4.3 Billion in Unsold Clothes

The company said operating profit fell 62 percent in the three months through February, sending its shares to their lowest closing price since 2005 on the Stockholm stock exchange.

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It is the latest in a series of issues for H&M. The company had to close stores in South Africa and faced a social media backlash after it ran an ad in January showing a black child model wearing a hooded sweatshirt that said, “Coolest monkey in the jungle.” Also, it and other retailers in Europe are girding themselves for an expected push by Amazon into clothing retail, one that Amazon has already been making in the United States.

Since the early 2000s, business has largely boomed for fast fashion retailers such as ASOS, H&M and Inditex, which owns Zara. They profited off their ability to generate, at a vast scale, rapid translations of runway fashions into low-priced clothing and accessories.

But while luxury brands have enjoyed a rebound in fortunes in recent months, fueled by millennial appetite and a recovery in demand from the lucrative Chinese market, mass-market companies have had to deal with enormous changes. In the digital era, the challenges around offering trendy apparel before it goes out of style have mounted, particularly as growing numbers of shoppers choose to buy from their smartphones and become more quality conscious.

ASOS is an online-only retailer, and Inditex has managed to ramp up its digital sales. But H&M, which also owns brands like Cos, & Other Stories and Arket, has fallen behind the pack.

Analysts have been downbeat on the Swedish company’s outlook. Rahul Sharma, founder of Neev Capital, called H&M “a slow-motion wreck” after the release of the first-quarter results. Analysts at the Swiss bank UBS said in a note to investors this month that they had come away from an H&M presentation in November “with no clear view on why focus on the core customer had been lost, and what was being done to fix it.”

H&M has insisted it has a plan, saying it would slash prices to reduce the stockpile and slow its expansion in stores. It said it hoped its online business would expand 25 percent this year.

Still, Mr. Persson, a grandson of H&M’s founder, acknowledged that the rapid transformation of the industry was weighing on his company.

“The start of the year,” he said, “has been tough.”

Follow Elizabeth Paton on Twitter: @LizziePaton.

Christina Anderson contributed reporting.

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