H&M Earnings: Less Cost Pressures in Second Half, Better Stock Turns, Sales Trends Offset Current Weakness

We are maintaining our fair value estimate for no-moat H&M HM B 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.

In the fourth quarter, H&M sales were flattish at constant exchange rates, continuing to underperform its bigger peer Inditex’s double-digit growth. Margin also remained under pressure, down 100 basis points to 8.2%, driven down by strong U.S. dollar (main sourcing currency) and higher raw material and freight costs. That said, these headwinds are diminishing and even reversing during the course of the year, which should help margin progression. Management was also upbeat about margin development going forward, planning to reach its 10% target already next year (versus by 2025 in our models), helped by a cost-cutting program aimed to deliver SEK 2 billion in savings.

On the positive side, however, H&M’s portfolio brands enjoyed strong growth (up 12%) in local currencies, and growth picked up in June to 10% in local currencies. Inventory levels were down 20% on a currency-adjusted basis, supporting cash flows and suggesting less risk of discounting for quarters to come. Management expects continued improvement in stock levels thanks to increased near-shoring and in-season purchases.