H&M: Now is not the time to hope for a profitability turnaround

We have updated our short- and medium-term forecasts for H&M in light of the potential tariffs, expectations of slower economic growth and escalating uncertainty. In our view, the short-term multiples reflecting this are not particularly attractive. We therefore change our recommendation to Reduce (was Accumulate) and lower our target price to SEK 130 per share (was SEK 145), mainly due to lowered 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 continued top-line growth, the main near-term risks to achieving this are a potential direct negative impact from tariffs, slowing economic growth and weaker consumer confidence.

Escalating trade tensions impacting H&M

The escalating trade war driven by the US administration poses a potential threat to H&M and the US fashion industry. The US accounts for around 13% of H&M's total sales in 2024, and the company's main production markets are in Asia. As a result, H&M is likely to be impacted by tariffs if the announced measures are implemented. Of particular concern are the tariffs targeting China, one of H&M's largest sourcing markets, where very high tariffs have been discussed. However, China has announced counter-tariffs, and it remains difficult to predict what tariffs will ultimately be imposed. In addition, other key sourcing countries such as Bangladesh (37% tariff), Cambodia (49%) and Vietnam (46%) are also facing steep tariff increases. However, all major competitors are facing similar challenges. H&M may be relatively less affected than competitors with more locally concentrated supply chains due to the flexibility and global reach of its sourcing network. Furthermore, as the entire industry is facing similar headwinds, it is possible that some of the increased costs could be passed on to consumers through price adjustments. However, we believe that the magnitude of the new tariffs will be difficult for H&M to fully offset through pricing, increasing the risk of further margin pressure.

We have taken a more cautious stance in our estimates

We have lowered our 2025 and 2026 revenue estimates by 1-2% to reflect the expected negative impact of tariffs and weaker economic growth. In addition, we have adopted a more cautious outlook for gross margins, as we believe the magnitude of the current tariffs will be challenging for H&M to pass on fully to customers. However, the impact may not be visible until H2'2025, as goods sold in Q2 are likely already in the U.S. Overall, we have lowered our earnings estimates for 2025 and 2026 by around 6-7%. We would like to emphasize that significant uncertainties remain and the situation could change rapidly, potentially impacting our estimates and valuation. Nevertheless, trade wars increase uncertainty and dampen demand. While it remains difficult to predict the final structure and level of tariffs or their full impact, trade tensions clearly pose a negative risk to the outlook.

Weak risk/reward given the uncertain environment

With our updated estimates, H&M's P/E and EV/EBIT for 2025 are 18x and 16x, respectively. These multiples are in line with our accepted valuation multiples, but we view them as relatively neutral given the current uncertain operating environment. More attractive valuation levels may only emerge when looking at the multiples for 2026 (P/E: 14x), although these estimates depend on uncertain improvements in earnings, which have so far disappointed. The DCF is also not sufficiently higher than the current share price, suggesting limited upside to the valuation. Overall, we believe that the stock is fairly priced given the uncertain operating environment and that more upside for the stock would require faster-than-expected sales growth and an easing of trade war concerns.