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Report: H&M is feeling the fallout from an accumulation of unsold merchandise

BY CSA Staff

Amid declining profits, H&M does have a surplus in one area — inventory.

The company is increasing markdowns this quarter after accumulating a record pile of unsold garments worth more than $4 billion, according to Bloomberg.

The company’s operating profit fell 62% to its lowest level in more than a decade. This was due to unseasonably warm European weather in January followed by February’s cold snap. When clearance sales failed to reduce quantities of T-shirts and jeans that customers had passed over, the company slash prices even more, to no avail, according to the report.

CEO Karl-Johan Persson said in the report that the company made mistakes by narrowing its assortment last year, though he expects sales to improve in the second half.

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Rite Aid completes its store transfers to Walgreens

BY Michael Johnsen

The transition is over.

Rite Aid on Tuesday finalized the transfer of 1,932 stores and related assets to Walgreens Boots Alliance in return for $4.2 billion. The transfer of the three distribution centers and related inventory is expected to begin after Sept. 1, 2018.

The majority of the closing conditions have been satisfied, and the transfers of Rite Aid distribution centers and related assets remain subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closing.

As part of its quarterly earnings report, Walgreens on Wednesday noted that the newly transferred Rite Aid stores will be a significant tailwind behind pharmacy results. “We expect to continue to grow, in part through the recent acquisition of stores from Rite Aid, and today we are raising our fiscal 2018 guidance,” Stefano Pessina, executive vice chairman and CEO of the Deerfield, Ill.-based retailer, said.

Walgreens raised the lower and upper ends of its guidance for fiscal 2018 and now anticipates adjusted diluted net earnings per share of $5.85 to $6.05.

Rite Aid also announced that its board of directors has terminated the tax benefits preservation plan that it adopted on Jan. 3, 2018. As a result of the Plan, Rite Aid protected approximately $2.2 billion of Rite Aid’s net operating losses. The Plan was originally scheduled to expire on Jan. 3, 2019.

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Retail side of Walgreens’ business needs improving

Walgreens has produced a good set of results, with a strong performance in pharmacy helping to drive up total sales by 12.1%. The continued integration of stores acquired from Rite Aid flatter the numbers, but as the comparable growth of 5.1% demonstrates, underlying pharmacy volumes are also robust.

On the bottom line, net income expanded by 27.0%, boosted by cost savings, higher equity earnings in AmerisourceBergen, and lower interest expense. In our view, this is a pleasing outcome given the margin pressure on generic drugs and the significantly higher income tax provision.

While Walgreens looks is healthy overall and remains on a sustainable growth trajectory, there are parts of the business where performance is less impressive.

One of these is the retail side where, despite the addition of Rite Aid stores, total sales dropped by 0.7%. On a comparable basis, revenue fell by 2.7%. Worryingly, this is a worse outcome than the last quarter, even though holiday sales should have boosted this period.

From our customer data, we believe Walgreens is making gentle progress in beauty. Improved shop layouts, enhancements to ranges, and better in-store marketing are all helping to drive sales. However, at the same time, competitors such as Target are also investing in stores and ranges. In our view, even with improvements, the vast majority of Walgreens stores remain below par when compared to the market as a whole.

This is one of the reasons why Walgreens failed to match the retail growth of players like Ulta and Sephora over the holiday period. As much as Walgreens is a favorite for last minute and convenience-based holiday purchases, it is generally off the radar as a go-to destination for inspiration, major gifting, and indulgent self-purchases. All of these areas are lost opportunities.

Admittedly Walgreens has a lot of stores to attend to, and it does not want to burn through capital in refurbishing them. However, in our view, an elevated beauty experience and a better general retail proposition are essential if Walgreens is to boost its market share in areas like general merchandise, cosmetics, and everyday personal care. In short, we believe the company has the potential to do a great deal better in retail. With the firepower of its own brands, like No. 7, behind it, Walgreens is in a unique position to create a compelling proposition.

Away from the U.S. operation, on a constant currency basis, international sales slumped by 2.6% this quarter; and comparable retail sales decreased 2.8%. Most of this was down to a poor performance at Boots in the U.K. Given that Boots’ retail proposition is much stronger than that the U.S. business, this is a disappointing outcome, especially over the critical holiday period. In our view, much of it comes down to both a more pressured U.K. consumer and a rather lackluster holiday line-up of product in stores. The blunt truth is that many Boots’ shops were devoid of inspiration over the holidays. Moreover, some stock issues in areas like fragrance gift sets were also unhelpful.

As we have noted before, Walgreens remains in a position to boost performance through operational tweaks and the integration of Rite Aid. However, we maintain our view it is not paying nearly enough attention to its core retail business. This is both a lost opportunity and, as competition in pharmacy heats up, a forward risk.

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