H&M: Margin improvement expectations cut

We believe consumer demand has remained subdued in H&M’s Q4 (Sep-Nov), although the strong September should support growth. We have lowered our margin assumptions for 2025 and beyond, prompting us to cut the target price to SEK 160 (previously 170). We continue to see the share as fairly valued and maintain a Reduce recommendation.

Strong start for Q4 didn’t carry through the quarter, we believe

H&M published already in conjunction with its Q3 report that it was off to a strong start in Q4 with September sales up 11%. After that, we believe the markets have remained more subdued, however, and hence the growth in Q4 (Sep-Nov) has not been as strong as we earlier expected. We now expect 4% growth in local currencies and with a clearly negative FX impact, only 1% growth in reported currencies.

On gross margin, H&M is facing several headwinds in Q4 (as reported already earlier) with pricing coming down, markdowns increasing and “external factors” ie. cost of the products and freight, for example, impacting negatively as well. The soft demand in Oct-Nov has most likely kept some pressure on pricing also during the quarter. H&M’s own efficiency measures are likely to offset some of the negatives, but we see a gross margin of 53.1% for Q4, down from 53.7% a year ago.

In terms of fixed costs, H&M’s earlier efficiency program is having its full impact and keeping opex in check. The company announced in end-Q4 plans to close its Monki chain, which is likely to incur some cost for Q4, which we believe will be of a similar magnitude as the closure of Afound in Q3 (200 MSEK). In total, we expect opex/sales to remain at last year’s level, with moderate top-line growth and efficiencies keeping costs under control. H&M will report Q4 in late January.

10% margin target starting to look more distant

As H&M is again putting more focus on its pricing and driving sales, we believe the margin improvement trend will be more moderate than previously expected. We expect gross margin to remain slightly over 53% in the coming years and top-line growth to drive opex/sales lower and hence EBIT margin higher. H&M might be hit by new tariffs between the US and China, as the US is one of H&M largest markets (some 15% of sales), while China accounts around 25% of its sourcing.

We still forecast EBIT margin improving from around 7% in 2024 to around 9% in 2026, but nevertheless the estimates for 2025-26 are down 8-12%. On the back of this, we have also lowered our long-term EBIT margin assumption to 9%, below H&M’s target of 10%. This has led to our DCF value decreasing to SEK 160.

Share continues to look fairly valued

H&M’s P/E for 2024 is 22x, while for 2025, the expected margin improvement drives the P/E down to 18x. The 2025 multiples are well in line with our accepted multiples. The multiples are well below the closest peer Inditex, which trades close to 30x for 2024. We believe some discount is fair, given Inditex’s better sales development. We estimate that H&M’s free cash flow and dividend yields will be around 4-5% in the coming years. After a larger earnings improvement in 2024-26, driven by the increasing margin, we expect a steady sales/earnings growth of 5% in the medium term. Our DCF value is in line with our target and close to the current share price. Therefore, overall, we see the share as quite fairly valued.