Fast fashion is about to take a dark turn and these retailers are in trouble, says Deutsche Bank

By Louis Goss

Investors should sell shares in top clothing retailers including Zara-owner Inditex and Swedish chain H&M in anticipation of a downturn in the fast-fashion industry, Deutsche Bank has warned.

H&M got a double downgrade from buy to sell and Inditex was cut from hold to sell, on Wednesday by analyst Cochrane who warned clients that shares of retailers would likely struggle. Shares of Inditex (ES:ITX) and H&M (SE:HM.B) each fell over 1% in early afternoon trading.

Cochrane said shifting consumer habits could lead to a backlash against fast-fashion as ESG (environmental, social and governance) concerns rise back up the agenda after being put on the backburner during the pandemic.

This increased focus on ESG could in turn push up clothes sellers' costs, by forcing them to use more sustainable materials, and improve their treatment of workers in the countries where clothes are made, he says.

Over the long term, ESG concerns also pose a fundamental threat to fast-fashion companies' business models, by requiring a significant drop in consumption.

At the same time, Cochrane said the post-COVID boom in demand for cheap clothes is set to fade in 2024, as the impacts of higher interest rates filter down into consumer spending. Rate rises, paired with rising unemployment and wider geopolitical uncertainty could all hit the retail sector's sales.

Increased competition at the lower end of the market, driven by the rise of low-cost online retailers Shein and Pinduoduo (PDD) owned Temu , will also eat into Inditex and H&M's share of the market, the bank warned. Reports that Shein, the China-founded fast-fashion giant, plans for a public listing has renewed questions about it's abilities to make clothing so cheaply.

Cochrane said this competition could be made worse by developments in AI which will let new players adapt to shifts in fashion trends more quickly, by utilizing big data.

The Deutsche Bank analyst warned government intervention could accelerate the backlash against fast-fashion, as he noted the French government in November urged consumers to boycott Black Friday sales having previously offered subsidies to those who repair their own clothes.

He said H&M will likely struggle to continue keeping a lid on its costs, as inflation forces it to hike wages and spend more on raw materials. He also warned Inditex' years-long stretch of outperforming the market is now coming to an end, as he argued competitors are increasingly rivaling the company and capturing its market share.

The analyst, meanwhile, recommended investors buy shares in British retailer Marks & Spencer (UK:MKS), saying its exposure to older, wealthier customers will insulate it from a downturn in spending.

-Louis Goss

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12-06-23 0914ET

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