More Difficult Than Hermes To Close 3778 Stores Is Gap

The year 2020 is nearly a third over, and the miserable days of the fashion industry are far from over.

The epidemic has caused a huge blow to the fashion industry. Both the fast fashion available to the public and the unattainable luxury goods in the past have tried their best to help themselves in the heavy losses.

Recently, fast fashion and luxury listed companies have released a quarterly report, affected by the epidemic, this year without exception, the performance of all declined. In the first quarter, sales of LVMH group and kering group were 15% lower than that of the same period of last year, while sales of Ferragamo in the three months ended March 31 were down 30.6% year on year.

By contrast, fast fashion's performance suffered later than luxury, but the impact was more lasting. H & m3's net profit is expected to be 46% higher than expected in the second quarter, but its net profit is expected to fall far in the second quarter. In its annual report released in late March, Zara's parent company said 50% of its stores around the world were temporarily closed, and sales in the first half of March fell about 24%.

Yang Li, managing director and global partner of Boston Consulting, told reporters that according to their survey of 100 CFOs and CEOs of fast fashion and luxury goods companies in the world, "43% of the CEOs of luxury goods industry think that sales will come back in 2021, but only 19% of fast fashion CEOs think they can come back in 2021."

In order to save themselves, pay cuts, store closures, and the full protection of the Chinese market have become a consensus.

The worst quarter in history, LV parent company and Gucci parent company both fell 15%

Recently, global luxury goods companies such as Ferragamo, LVMH group, kering group and Hermes have successively released their first quarter report cards, and the sales data are very sad. Before that, the high-speed growth was pressed by the epidemic situation to pause.

Sales of Italian luxury goods maker Salvatore Ferragamo S.p.A ("Ferragamo") fell 30.6% from a year earlier to 220 million euros in the three months ended March 31, compared with a 4.3% increase in Ferragamo in the first quarter of 2019. If calculated at the constant exchange rate, it fell by 31.4% compared with the same period last year.

Micaela Le divelec lemmi, Ferragamo's chief executive, admitted that all sectors of the group's global markets were affected by the new crown pneumonia, and the future was full of uncertainty.

LVMH, the world's largest luxury group, saw sales fall 15% to 10.6 billion euros in the first quarter ending March 31, with revenue from its core fashion and leather division down 9% to 4.643 billion euros, while sales of perfume and cosmetics fell 18% to 1382 million euros.

LVMH group said the main reasons for the decline in sales were the suspension of many stores and production plants, as well as the policy of blockade and quarantine and travel ban. And that the second quarter of this year will continue to be affected by the epidemic, but it is not yet possible to make accurate expectations. Jean Jacques guiony, chief financial officer of LVMH group, revealed in a conference call with analysts that Dior performed better than other fashion brands in the group, while Givenchy, Celine and Fendi were worse.

Kering group, another major French luxury goods giant, basically fell in the first quarter of this year with LVMH group. In the three months to March 31, kering Group sales fell 15.4% to 3.2 billion euros from a year earlier, while sales rose 21.9% in the same period of the previous year. Among them, sales in the luxury sector fell 16% to 3.066 billion euros, exceeding the 15% decline expected by kering group.

From the perspective of several major brands of kering group, the sales of core brand Gucci in the first quarter dropped 22.4% to 1.804 billion euro compared with the same period of last year, and increased by 24.6% in 2019. Yves Saint Laurent's sales fell 12.6% from a year earlier to 435 million euros. In the same period of 2020, the sales of the group's venega brand increased by 1.03 billion euro in the same period of 2020, but the only brand in the group increased by 1.03 billion euro compared with the same period in 2020.

Fran ó OIS Henri Pinault, chairman and chief executive officer of kering group, said in the financial report that the outbreak had dealt a heavy blow to the group's performance in the first quarter. Jean Marc duplaix, the group's chief financial officer, said it was too early to predict the overall performance of kering group in the second quarter, with no significant change at least until June or July.

Hermes' first quarter sales fell 6.5% from a year earlier to 1.505.5 billion euros. At the fixed exchange rate, it fell 7.7%, but it was still slightly higher than the expected 1.45 billion euro. All of the regions except Japan and Hermes were most affected by the closure of its stores in Asia. The closure will have a significant impact on Hermes' second quarter sales.

As of the end of April 25, Beijing time, the shares of Ferragamo, LVMH, kering group and Hermes were 11.04 euro / share, 341.3 euro / share, 450.85 euro / share and 675.4 euro / share, respectively. The market value of the four luxury goods companies was 1.86 billion euro, 172.4 billion euro, 56.9 billion euro and 71.3 billion euro respectively.

The only luxury market in China

Under the black swan of the epidemic, even the giants are not immune. Luxury goods are not waiting to die, and they are adjusting their strategies. It seems that the Chinese market and the pay cut of senior executives seem to be the consensus of everyone.

In an interview with MFF, Ferragamo's chief executive, micaela Le divelec lemmi, said in an interview with the Italian media MFF that the mainland stores in China had been reopened and passenger flow was gradually recovering, and the attitude of about 650 colleagues in Greater China was also "very encouraging". Micaela Le divelec lemmi also pointed out that the Chinese market is the "only glimmer of light" at present.

To offset the decline in sales, LVMH plans to cut capital spending by 40% this year. Most of the savings come from projects that have been postponed to 2021, according to guiony. Arnault, the chairman and other members of the board, said in April 2020 that he and other board members would accept a pay cut.

Like its rival LVMH group, kering has decided to cut its dividend by 30%, while Francois Henri Pinault has decided to cut its salary by 25% of the fixed salary for the rest of this year and the performance-based floating pay for the whole of 2020. Meanwhile, the compensation incentive for CEO and deputy CEO in fiscal year 2020 will be abolished, and the board expenses will be reduced by 30%.

It is worth mentioning that luxury companies are optimistic about the recovery of the Chinese market. LVMH group said that in the second half of March, there were preliminary signs of recovery in China. Jean Jacques guiony also revealed that in some parts of the mainland, sales in early April were up 50% year-on-year. Hermes also pointed out that at present, all stores in mainland China have resumed work, of which Guangzhou stores have reopened after expansion in early April, and sales have gradually recovered; although the passenger flow of stores in Hong Kong and Macao in China has decreased due to immigration control, they have still recovered their passenger flow.

"In fact, most luxury goods understand that most of the opportunities in the second half of the year are in China, so they hope to transfer the best goods to China to meet the needs of Chinese consumers." Yang Li told reporters that once the offline stores of luxury goods are restored, "this group of people who buy luxury goods will be relatively less affected in all aspects of their income. As long as the stores resume normal business, they will resume their buying behavior more quickly."

Yang Li told reporters that according to the Boston Consulting survey, 43% of CEOs believe that luxury sales will rise rapidly in 2021. "At present, we all feel that China's recovery is far faster than they expected, and luxury sales are recovering rapidly."

Fast fashion is worse than luxury goods. By the end of March, H & M closed 3778 stores worldwide

Compared with luxury goods, the pace of fast fashion out of the shadow of the epidemic is more difficult.

A fabric supplier for H & M, Zara and other brands disclosed to each reporter that 95% of the orders were cancelled, and the company lost more than 60% of its annual losses.

"As the market shrinks dramatically, we have to make a lot of tough decisions and take strong actions," said Helena helmersson, H & M's new chief executive

"We have to close every day and the situation is getting worse." H & M said in its first quarter report that by the end of March, 3778 of its 5065 stores had been closed, covering 54 markets including Germany, the United States, Italy, France and Spain. "Shop closures add to the downturn in market demand, which has had a significant negative impact on sales so far in March."

In order to reduce costs, H & M is negotiating with tens of thousands of employees to cut jobs, and is considering layoffs. The top management will temporarily reduce their salaries by 20%; it is expected that the operating expenses (excluding depreciation and amortization) in the second quarter of 2020 will be reduced by about 20% - 25%; in order to reduce the rent cost, the company is applying for rent relief from local governments on the basis of dialogue with landlords.

Even with a variety of cost reduction efforts, H & m still admitted in the first quarter that the second quarter would be a loss quarter because the reduction in operating costs could not offset the sharp drop in sales.

Zara, another fast fashion giant, has also been greatly affected. INDITEX, the parent company of Zara, has closed all stores of its brand in Spain and plans to convert some fabric production lines into professional medical fabric production lines. So far, 3 785 of INDITEX's 7 469 stores worldwide have been temporarily closed. According to Reuters, if Spain's emergency continues beyond mid April, Zara's parent company INDITEX group is considering temporary layoffs of about 25000 stores in Spain, which will be one of the largest such moves in Europe due to the outbreak of the new coronavirus, according to Reuters.

Gap, a well-known fast fashion company in the United States, is also in danger. According to the 2019 financial report released by gap group in March this year, the company's net profit in fy2019 fell by 65% year-on-year. The company originally planned to close about 170 gap brand stores worldwide in 2020.

At present, gap has nearly 4000 stores in the world, more than 70% of which are located in North America, contributing nearly 80% of its revenue. With the development of the epidemic situation in the United States, gap has temporarily shortened the business hours of all stores in the United States and Canada since March 16, closing more than 100 stores in the worst affected areas. It is estimated that gap sales will lose about $100 million in the first quarter of 2020.

The straw industry will soon collapse as soon as possible

On April 23, according to CNBC, gap said its stores were forced to close during the outbreak, and the company was running out of cash at an alarming rate, and the company may not have enough cash to support its operations.

In Yang Li's view, this epidemic situation can still produce different brand's response ability. First of all, it depends on how well the cash flow is grasped. Secondly, it depends on the flexibility of the brand supply chain. "Whether the fast fashion industry can really be very flexible to cope with the changing demand of the supply chain." "We can see that some brands can maintain a better position after the outbreak."

In fact, the reshuffle of the fast fashion industry has already begun, and the epidemic situation has become the last straw to crush many fast fashion companies.

Esprit is on the verge of withdrawing from the Chinese market due to its great defeat. Last year, American fast fashion brand Forever 21 withdrew from the Chinese market, followed by ASOs, newlook and Topshop. Zara and H & M, which are still "guarding" in the Chinese market, are also trapped in the bottleneck of weak performance growth.

As for the crisis of fast fashion industry in China market, Yang Li believes that the mode of fast fashion industry emphasizes "extreme efficiency", but this "only fast" foreign brand has been greatly challenged in China, because there are many domestic brands with faster and higher efficiency.

"China has a very mature and huge local supply chain. The KOL brand developed in the past two years can quickly use the supply chain network to launch their personal brand." In addition, compared with foreign fast fashion brands, China's local KOL brands use digital marketing faster, more accurately and better, Yang said.

Will the closure of factories around the world lead to the situation that fast fashion and luxury goods will be sold out in the second half of this year? What should we do with the overstocked stock of fast fashion products with strong seasonality?

"Although the supply chains in Europe and the United States have been greatly affected, the protection of supply to the Chinese market should be placed very high in the" to do list "of every CEO. Therefore, I don't think it is very possible to run out of goods substantially. There will be a temporary shortage in the global scope. In terms of inventory, fast fashion has started a more active round of sales promotion recently. Luxury hasn't happened yet. Luxury still hopes to avoid promotion. "