H&M Q1'25: Gross margin more sluggish than expected

H&M's Q1 earnings were weaker than expected, and we anticipate continued margin headwinds in Q2. However, we foresee revenue growth and a shift from gross margin headwinds to tailwinds starting in H2’25, leading to continued sales and margin improvements throughout 2026-27. We maintain our view that earnings growth and dividends offer a reasonable expected return and, therefore, reiterate our Accumulate recommendation with a slightly lowered target price of SEK 145 per share (previously SEK 150), reflecting lower short-term estimates.

Weak gross margin was the negative highlight in the report

H&M’s revenue increased 2% in local currencies year-on-year, roughly in line with our expectations. Reported sales growth was around 3%, due to a positive FX impact. The gross margin was the main negative surprise in the report, which fell to 49.1% in Q1’25 from 51.5% in the corresponding period last year. External factors such as FX and freight had a negative impact, as well as increased markdowns and lower prices. SG&A was at good levels due to good operational cost control and OPEX/sales ratio decreased in Q1’25 compared to the same period last year, despite inflationary pressures in the cost base and increased marketing. All in all, EBIT fell clearly below last year and expectations to only 1.2 BNSEK, mainly due to a lower gross margin. The first quarter is, however, the smallest quarter of the year for the company in terms of sales and margin.

Slight positive start to Q2, but margin pressure prevails

H&M reported that it expects March sales to increase by 1% in local currencies, roughly in line with our expectations. However, one month of sales data is volatile, and we do not draw significant conclusions from it. Nevertheless, we anticipate modest sales growth in Q2, with stronger growth figures likely delayed until H2’25, supported by easier comparisons and, hopefully, improved consumer confidence.

Regarding gross margin, the company also commented that the overall effect of external factors is expected to be negative in Q2’25 compared to the previous year. However, H&M anticipates that the negative impact from external factors, increased markdowns, and investments in the customer offering will be significantly smaller in the second quarter than in the first. This was also largely in line with our expectations. However, the Q1 report suggests that a recovery in gross margin will likely be pushed to at least H2’25, when we should also see better sales growth.

We continue to expect growth and improving margins in 2026-2027

While our short-term estimates have decreased somewhat due to a weaker-than-expected Q1, we kept our mid- to long-term estimates largely unchanged. We still anticipate mid-single-digit growth over the medium term. Given our expectation of a relatively stable gross margin in the coming years, this should provide some operational leverage. We forecast revenue growth, coupled with continued cost efficiencies, driving an EBIT margin increase from 7.4% in 2024 to approximately 9% in 2027. As a negative risk, H&M might be hit by new tariffs between the US and China, as the US is one of H&M's largest markets (some 15% of revenue), while China accounts for around 25% of its sourcing.

We still see a good risk/reward ratio

H&M's P/Es for 2025 and 2026 are 18x and 14x, which is below H&M’s historical trading levels, considering the 10- and 5-year medians of around P/E 20x. In our view, these multiples look fair or even modest. However, they require the expected margin improvement to materialize, which disappointed in 2024. In our view, the expected earnings growth and dividend provide a solid total expected return above our required return. Our DCF is also in the green, in line with our target price, suggesting some upside. Overall, we, therefore, consider the risk/reward/ratio good.