Hennes & Mauritz’s Profit Still Under Pressure but Fewer Headwinds Going Forward

We are maintaining our fair value estimate of SEK 179 per share for no-moat Hennes & Mauritz HM B 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, with inventory being down 16% at constant currencies despite positive sales growth.

We believe the firm still benefits from some scale and strong brand recognition in its top markets and efforts to speed up supply chain and control costs should, longer term, improve the top and bottom lines. Shares look attractive.