• Operating profit at
  • The company is increasingly losing to fast-fashion competitors like Zara and ASOS, which have sped up their supply chain to stay on top of trends.
  • We visited the store to see firsthand what's happening.

The king of fast fashion has been knocked off its pedestal.

H&M's share price fell 5% after the store reported a drop in profit in the first quarter of 2018 on Tuesday. Operating profit was down 62% versus the year before. It was negatively impacted by weak sales and higher markdowns during the quarter.

For years, H&M was regarded as a revolutionary retailer with a speedy supply chain that enabled it to stay on top of trends. However, sales growth at the company started to falter in 2016 and continued throughout 2017, culminating in its biggest sales slump on record in the last quarter of 2017.

"Weak sales in the fourth quarter, partly caused by imbalances in the assortment for the H&M brand, resulted in the need for substantial clearance sales in the first quarter," CEO Karl-Johan Persson said in a note to investors on Tuesday.

He added: "The high level of clearance sales combined with unusually cold winter weather had a negative impact on the sales of the spring garments."

Persson confirmed that a turnaround is still at the forefront of the company's strategy. It's investing in new technology to speed up its supply chain, growing its online business, and adding new brands to its portfolio, such as Nyden, which launches this year.

"Our transformation work continues with full force," he said.

We recently visited one of its stores in New York City

We visited H&M's store in Soho in January. The store is located right next door to its biggest rival, Zara, in one of the city's busiest shopping areas.

On first impression, the store looked empty, which wasn't too surprising considering that we visited on a weekday.

But a visit to the Zara store next door was very telling. This store was buzzing with customers shopping its winter sale.

H&M was once known for its slick supply chain but has been outsmarted by competitors like Zara, Boohoo, and ASOS.

These stores have moved

According to a report done by Fung Global Retail & Technology, it takes online stores ASOS, Boohoo, and Misguided between one and eight weeks to get a product from concept to sale. Zara has a speedy five-week turnaround, while H&M can take up to six months. H&M did not return Business Insider's request for comment about its supply chain speed.

This slower turnaround means that H&M isn't able to get new trends out on the shelves or respond to consumer demands as quickly. This was visible in store: the display at the entrance, which should be drawing customers in, looked drab.

In Zara, on the other hand, you're instantly drawn in by glitzy designs.

Persson blamed lower profits during the first quarter on aggressive sales. Despite this, inventory levels were up 7% versus the year before.

We can expect to see more markdowns in the second quarter of 2018.

At Zara, it felt more like you're getting a trendy bargain rather than doing the store a favor by getting rid of old, unwanted stock.

Further inside the H&M store, there was another prominent display of womenswear. Although this was well laid-out, the mismatch of styles made it hard to understand what kind of person and situation these clothes were being marketed to.

H&M's workwear was a prime example of how the store can sometimes be off-target ...

... and there was an excessive amount of simple apparel.

H&M has faced increased pricing pressure from online stores. The prices were cheap in the store but sometimes felt a little off. This flimsy black skirt cost $29.99.

This men's faux leather jacket cost $69.99 ...

... while a pair of good quality cotton chinos cost only $29.99.

H&M is growing its digital platform but still falling behind other fast-fashion retailers like ASOS. Persson said that he is expecting online sales and new business to grow 25% during the year.

"We are integrating our physical and digital stores to offer our customers a great shopping experience with services ranging from Click and Collect to Scan and Buy and online returns in store," Persson told investors in the company's year-end earnings report in January.

Overall, H&M seemed muddled. It felt like it was trying to be all things to all people, but this message was ultimately confusing.

The company is now trying to grow its online platform, scale back on stores in oversaturated markets, and focus on adding trendy new brands to its portfolio.

Its eagerly anticipated new venture, Nyden, launches online this year.