H&M will report its Q3’24 (June-August) results on Thursday at 8:00 am CEST. We expect revenue growth to be slightly positive in local currencies, but negative in reported terms. We expect EBIT to decline y/y with a roughly stable gross margin and slightly higher opex with a negative sales trend hitting the earnings. We highlighted the headwinds in Q3 already in our previous report.

Revenue growth expected to be barely positive in Q3 in local currencies

In conjunction with its Q2 report, H&M communicated that June sales are expected to be down 6%. While this was against a tough comparison figure, June is the biggest month in Q3. We believe that the consumer sentiment has remained soft and hence we now think it unlikely that H&M would hit the target of mid-single-digit growth in H2. Our local currency growth expectation is 1% for Q3, practically in line with the consensus of 1.5%. We believe the negative FX impact will turn reported growth negative in Q3.

Several headwinds on margins

While H&M enjoyed quite a strong improvement in the margins during H1, driven by gross margin improvement, the situation looks different for H2. For Q3 specifically, there will be headwinds to gross margin from ”external factors” such as freight and raw material costs, as well as higher markdown and generally declining prices. These have all been communicated by H&M before, but we believe the softer-than-expected demand could put some extra pressure on the margin. We foresee the gross margin in Q3 to be only marginally ahead of last year at around 51%. With reported sales declining, H&M will not see any operational leverage in Q3, which hits the EBIT as we see limited opportunities to adjust opex in the short term. Our EBIT forecast is below consensus, although both expect a decline y/y.

10% EBIT margin target for 2024 slipping out of reach

H&M does not give financial guidance but has said that its ambition is an EBIT margin of 10% in 2024. For the past 12 months, H&M has delivered an EBIT margin of 7.6%, and we see only little improvement during H2, with 2024 ending at around 8%. From this starting point and given the current sluggish demand, we do not believe the target will be reached in 2025 either. Nevertheless, we continue to see a positive margin trend and H&M reaching an EBIT margin of 9.0% in 2025 and around 9.5% in 2026. We believe the improvement requires clear top-line growth, which would give leverage to opex, and thus the margin improvement is dependent on demand improving.