Company Reports

We are maintaining our fair value estimate for no-moat Hennes & Mauritz as the company reported declining sales but stronger profitability in the first quarter. After rallying 13% intraday, shares look slightly undervalued.

No-moat Hennes & Mauritz reported stagnant sales growth in the fourth quarter of 2023 compared with the previous year. Notably, the gross margin and operating margin exhibited an encouraging uptick, reaching 53.7% and 6.9%, respectively, as opposed to the 49.8% and 1.3% figures recorded in the preceding year. Despite the improved profitability, shares are down 11% at the time of writing; we surmise investors are not happy with the announcement that Helena Helmersson is stepping down as CEO and being replaced by Daniel Ervér.

We are maintaining our fair value estimate of SEK 190 for no-moat Hennes & Mauritz as the company reported flat constant currency revenue but solid profit improvement in the first nine months of 2023. At current levels, shares look attractive.

We are maintaining our fair value estimate for no-moat H&M at SEK 190 per share after the company reported a rather challenged second quarter but with some signs of optimism. After an 18% rally during the day, shares look fairly valued.

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Further, the company's responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 140 days in 2022, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.

We are maintaining our fair value estimate of SEK 179 per share for no-moat Hennes & Mauritz as the company reported first-quarter profits still under pressure by strong a U.S. dollar and freight costs. We expect those headwinds to annualize or unwind during the course of the year. Sales in local currencies were up 3% in the quarter but 7% if operations in Russia, Belarus, and Ukraine were to be excluded. The comparison base gets easier from March onward. Smaller brands enjoyed stronger growth, up 11% at constant currencies. Gross margin was down 210 basis points due to aforementioned headwinds of currencies and freight costs, with markdowns being flattish. Selling and administrative costs were contained, growing at 3%, in line with sales in local currencies. Further on the plus side, inventory turns improved, inventory being down 16% at constant currencies despite positive sales growth.

We do not expect to materially change our SEK 179 fair value estimate for no-moat Hennes & Mauritz as the company reported sales in line with its sales announcement and our estimates, but significantly lower operating profitability even when one-off items are excluded (4.4% operating margin versus 7.7% in 2021 and 5.5% in our forecasts). We agree with management that a significant portion of earnings pressure is improving in the current year (for example transportation costs, purchasing cost inflation, strong U.S. dollar, annualization after suspension of Russian business in the second quarter). Management kept its target for double-digit operating margin by 2024, which is consistent with our estimate for 10%.

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Further, the company's responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 145 days in 2021, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.

We are maintaining our fair value estimate for no-moat Hennes & Mauritz as the company reported weakening revenue and profits in the third quarter, hit by discontinuation of operations in Russia and weaker consumer trends elsewhere. For now, we are comfortable with our full-year forecasts that are around 3.5% lower than average FactSet consensus estimates and imply slight margin shrinkage. We view H&M shares as attractively priced at current levels but prefer Inditex as our top pick in the sector based on the quality of its business model and valuation.

We are maintaining our fair value estimate of SEK 179 for no-moat Hennes & Mauritz, or H&M, as the company reported a strong increase in sales and profitability in the second quarter despite the suspension of operations in Russia and Ukraine and inflationary pressures. Shares look attractive at current levels with around 40% upside to our fair value estimate. The company announced a buyback of SEK 3 billion, equivalent of 1.5% of market cap, which we view favorably given its attractive share price and SEK 16 billion in net cash on the balance sheet.

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Further, the company's responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 145 days in 2021, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.

We maintain our fair value estimate of SEK 168 for no-moat Hennes & Mauritz after it announced first-quarter results. Although shares should start to look attractive after the March 31 sell-off (on the grounds of lower profitability than expected by the market), we see a better combination of quality and value in the apparel sector in narrow-moat Inditex, trading in 5-star territory.

We are maintaining our fair value estimate of SEK 168 per share for no-moat H&M as the company reported full-year revenue broadly in line with our projections. We regard shares as approximately fairly valued at this moment and would recommend to investors its peer Inditex for better business model and execution quality and valuation (4-star, 15% discount to our fair value).

We are maintaining our fair value estimate of SEK 168 for no-moat Hennes & Mauritz as the company reported an expected uplift in third-quarter revenue and improvement in its operating margin to 11.3%. Shares look fairly valued.

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Further, the company's responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 149 days in 2020, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.

We are maintaining our fair value estimate of SEK 168 for no-moat Hennes & Mauritz as the company reported first half results largely in line with our annual expectations. Sales were up 12% in the first half in local currencies (only 3.5% in SEK with strong currency headwind) and improved 75% in the second quarter (at constant currencies) on an easy comparison base--the second quarter was the most affected by global store closures in 2020. In June, sales were up 25% at constant exchange rates versus 2020 levels, with most stores open. Online continued strong growth in the quarter, increasing by 40% in local currencies.

Although we still believe that Hennes & Mauritz, or H&M, (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Further, the company's responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 149 days in 2020, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.

We are maintaining our fair value estimate of SEK 162 per share for no-moat H&M as the company reported first-quarter results, negatively affected by persistent lockdowns in Europe. Shares look moderately overvalued, trading as of March 31 at around a 20% premium to our fair value estimate in 2-star territory.

We are maintaining our fair value estimate of SEK 162 for no-moat H&M as the company delivered full-year sales in line with its preliminary announcement and better profitability than we expected. We may reduce our 2021 expectations slightly, given the continuity and severity of lockdowns in Europe (around 40% of stores for H&M group are currently closed). We don’t expect this to have a material impact on our fair value estimate. The shares are trading at a slight premium to our fair value estimate in 3-star territory.

Mass-market apparel is a tough, highly fragmented industry, where the biggest players claim only low-single-digit market share and moats remain elusive through a lack of sustainable pricing power and aspirational value and fashion risks. Historically, companies like Inditex and Hennes & Mauritz managed to navigate these challenges through feedback-loop-driven design and small batches of supplies at attractive prices, gaining market share not only against midprice players, but even luxury ones, in the apparel segment. However, in the age of digitalization amid growing concerns over sustainability, investors are increasingly questioning this business model. We believe no-moat H&M and especially narrow-moat Inditex remain well positioned to tackle the new industry challenges.