As H&M lags, TJX models inventory management in the e-commerce age

Dive Brief:

According to H&M's recently released Q3 2017 report, online sales constituted 25-30% of the company's total sales, but the profit margin dropped as a result of "large markdowns in order to give the autumn garments the best possible conditions for the new season." The report further stated that Q3 markdowns increased by 2.8% YoY because inventory levels were "too high."
After further examination of H&M's previous quarterly reports over the past year (Q2 2017, Q1 2017, Q4 2016, Q3 2016), shrinking profit margins have become at least a two-year trend (despite a stronger Q2 2017). In the Q3 2017 report, H&M said new technologies are helping the fast-fashion company make its supply chain more efficient, "to improve quantification, allocation, pricing, design and personalized communication. Faster lead times, a more efficient supply chain and more purchases during the season provide us with great opportunities to achieve lower stock levels in future."
Supply Chain Dive compared H&M's Q3 2017 inventory metrics to those of TJX Cos. (which owns popular discount retailers Marshall's, TJ Maxx and Home Goods) and found that TJX's inventory management is much more precise, fluid and controlled because the company has a stronger supply chain, resulting in a wider profit margin.

Dive Insight:

E-commerce has shaken up the retail industry, but the reason why some retailers — like H&M — are still struggling is because they're failing to accurately gauge and meet consumer expectations and manage supply chains accordingly. According to the metrics, H&M has been grappling with its inventory levels for a while, and adding 427 new brick-and-mortar store locations last year probably didn't help.

While H&M's Q4 2016 report revealed that the company "could have done better" with its supply chain, and is pursuing RFID tagging methods and automation in warehouses to increase supply chain efficiency, markdowns are still negatively affecting profits almost a year later, which means the company is still suffering from an inventory management problem. That's why the company unleashes round after round of markdowns while H&M shoppers enjoy sale after sale.

TJX, on the other hand, appears to have inventory management nailed.

The discount retail behemoth's Q3 2017 report states that the company's "consolidated average per store inventories, including inventory on hand at our distribution centers (which excludes inventory in transit) and excluding our e-commerce businesses, decreased 6% on both a reported and constant currency basis at the end of the second quarter of fiscal 2018 as compared to the prior year."

Furthermore, according to TJX's financials, over the past few quarters, the company has raised inventory levels to meet demand. TJX's inventory is more fluid; the company doesn't hold items in stock for long periods of time; instead, the company acquires and ships to meet immediate and changing consumer demands.

In the third quarter, TJX's supply chain costs rose 0.9%. But even though those costs are rising, at the same time inventory management is improving and offsetting those rising expenses, indicating that TJX is simply getting better at handling and managing all facets of its supply chain and is being rewarded with higher profit margin.

According to Supply Chain Dive's analysis of past quarters, this is a continuing positive trend for TJX. Of course, some of TJX's supply chain agility could be attributed to its procurement system: the company buys clothing from major retailers in the off-season when the clothing is already marked down, then turns around and sells it the following season for a profit. (More details of how TJX Companies does this can be found in its Q2 2017 report.)

When comparing the two companies, it's probably unfair to simplify H&M's problems to only supply chain inefficiency and TJX's success to supply chain agility, but there's something to be said for how inventory management can impact profit margins. H&M's admission that markdowns and supply chain inefficiencies are dragging profits down in the near term, so if the company can't get its supply chain on track,long term viability will become a challenge.