H&M Q4'25: Slow growth, stronger profitability execution

H&M’s Q4 earnings surprised on the upside again, which makes us more confident that a gradual margin recovery is taking shape. While the operational cost control was strong this quarter, sales growth remained modest, something we view as critical to reach its long-term margin ambitions. In our view, the valuation levels are still elevated, and, given the ongoing topline concerns, we still view the risk/reward as unattractive. As a result, we reiterate our Sell recommendation but increase our target price to SEK 155 per share (prev. 140 per share), mainly due to increased earnings estimates.

Investment case relies on increased sales growth

In our view, H&M's investment case depends on product and brand investments to strengthen the customer offering and drive a sales-driven margin recovery. While the biggest positive driver for H&M is clearly topline growth, the main near-term risks to achieving this are a lack of brand traction and prolonged weak consumer confidence.

Topline challenges persists but margin improvement was strong in Q4

H&M’s topline challenges persisted in Q4, with revenue growth in local currencies reaching a modest 2%. Overall, we view the Q4 sales outcome as rather modest, and H&M’s strategic initiatives around product offering and customer experience have yet to translate into meaningful top-line growth.

While H&M’s sales growth remained modest, profitability was clearly the main positive takeaway from the report. H&M’s Q4 gross margin increased to 55.9%, up from 54.6% last year, supported by continued supply-chain efficiencies and external tailwinds, although less favorable than in Q3. Operating expenses surprised positively again, with SG&A declining by around 3% in local currencies, contributing to EBIT of 6,364 MSEK and an EBIT margin improvement from 7.4% to 10.7%. The company also announced a higher-than-expected dividend, raising the payout to SEK 7.10 per share, supported by a solid balance sheet. Looking ahead, the key question remains the sustainability of the margin improvement. While cost efficiencies should continue to support profitability, a recovery in sales growth will be essential to deliver sustainable, long-term margin expansion.

Upward revisions to earnings estimates

Q1’26 has started weaker than expected, with December–January sales declining by 2% in local currencies, reflecting muted demand in parts of Europe. As a result, we have lowered our revenue forecast for the current year, also factoring in continued FX headwinds. That said, given H&M’s consistent outperformance on operating cost control over the past three quarters, we remain confident in a continued margin improvement, although with some short-term fluctuations. Despite lower revenue expectations, we have therefore revised our earnings estimates slightly upward. Looking further out, we have raised our mid- to long-term earnings forecasts, assuming mid-single-digit revenue growth and gross margin expansion toward 54–55%, supporting operating leverage. We forecast the EBIT margin to stabilize at around 9–9.5% over the long term.

Still elevated valuation levels

In our view, the valuation multiples are high in absolute terms (2026e P/E: 21x and EV/EBIT: 17x), above H&M long-term medians. Our DCF model and relative valuation paint a similar picture. While H&M’s strong brand and healthy balance sheet are convincing, there are still topline concerns, and we believe that in the still uncertain operating environment, overstretched multiples are unwarranted. Hence, we believe that the risk/reward is weak.