We are maintaining our fair value estimate of SEK 190 for no-moat Hennes & Mauritz HM B 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.
Third-quarter and nine-months sales were both flattish, continuing to underperform bigger peer Inditex. H&M brand was responsible for sluggishness, as portfolio brands, which include COS and Arket, were up 10% in local currencies for the quarter and nine months. Sales in Western Europe grew by a low single digit in local currencies, sales in Americas were flat, and sales in Eastern Europe dropped 17% with a still-challenging comparison base due to suspension of operations in Russia, Ukraine, and Belarus. Net 90 unprofitable stores have been closed during the first nine months, which we take positively, given the shift to online channels and H&M’s brand footprint, especially in European markets. We believe closures should result in better store densities and more efficient inventory management, supporting the margin. Closures should moderate going forward, according to management.
Gross margin saw a significant 190-basis-point uplift in the quarter, helped by more favorable sourcing costs that more than offset higher markdowns. Sales and administrative expenses were down 10% in constant currencies in the quarter, contributing to strong margin improvement. The cost efficiency program aimed at SEK 2 billion in annual savings is underway. Management still intends to reach 10% operating margin by 2024, ahead of our projections for 10% margin only in 2025. The inventory position also improved (down 21% currency adjusted) through higher share of near-shoring and more in-season buying that should support full-priced sales in the fourth quarter. These actions should also result in a better customer offering and increased sales over time.
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