H&M Q2'25: We are awaiting a sales led margin recovery
H&M’s Q2 results were operationally largely in line with our expectations, and we made only minor upward revisions to our short-term estimates. The company’s performance and outlook suggest that a meaningful recovery will take time to materialize. In our view, short-term drivers remain weak, including low consumer confidence and a slow margin recovery. As a result, we believe that the stock is already sufficiently priced in for high earnings growth (2025e P/E: 20x). Therefore, we reiterate our Reduce recommendation and target price of SEK 130 per share.
Q2 revenue in line with estimates, but margin beat expectations
H&M continued to face challenges in achieving revenue growth in Q2'25, and we saw little indication of a sales recovery taking shape. Revenue grew modestly by 1% year-on-year in local currencies, roughly in line with our expectations but slightly below the consensus forecast. Reported sales growth decreased by 5% due to negative FX impacts. On a slight positive note, H&M’s gross margin declined less than our expectations to 55.4% from 56.3% in the same period last year. External factors like FX and freight had a negative impact, but these should turn positive from Q3 onwards as a weaker USD leads to cheaper sourcing. In addition, investments in the customer offering, i.e., price adjustments to maintain a competitive position, also affected gross margins negatively.
In terms of operating expenses, H&M demonstrated continued good cost control in Q2, despite increased marketing costs. On one hand, margins benefited from the 199 MSEK one-off cost in Q2'24 related to the cost-saving program. On the other hand, the company experienced some OPEX deleverage due to FX, as SEK represents a larger portion of H&M's operating costs than sales. Overall, H&M’s absolute EBIT was 5,914 MSEK, and profitability (EBIT-%) declined from 11.9% last year to 10.4%. Although operating profit exceeded our forecast, a more significant margin improvement requires stronger sales growth.
We made only minor estimate changes
H&M reported that it expects June sales to increase 3% in local currencies, which was rather modest given the easy comparison period last year (-6%). However, one month of sales data is volatile, and we do not draw significant conclusions from it. Nevertheless, we still anticipate relatively modest sales growth in Q3, with stronger growth likely delayed until 2026, supported by easier comparisons and, hopefully, improved consumer confidence. Regarding the gross margin, the company expects H2 to benefit from easing external cost pressures, in line with our expectations. However, Q3'25 markdowns are, according to the company, expected to be higher year-over-year. While Q2 margins exceeded expectations, leading to a 3-4% earnings revision, we remain cautious about significant margin expansion without higher revenue growth.
For 2026-2027e, we still believe that the pace of margin improvement will be gradual, with revenue growth, coupled with continued cost efficiencies, driving an EBIT margin increase from 7.4% in 2024 to approximately 9% in 2027. While H&M continues to target a long-term EBIT margin of 10%, we do not expect this target to be met, given the highly competitive environment, which we expect will put pressure on pricing power over time.
We reiterate our Reduce recommendation
In our view, the valuation multiples are high in absolute terms (2025e P/E: 20x and EV/EBIT: 17x), and the DCF is also below the current share price. H&M’s strong brand and high return on capital are convincing, but the earnings growth outlook is slower and in the current macroeconomic environment overstretching multiples seems unwarranted. Hence, we continue to stay on the sidelines and wait for better risk/reward.