In our view, H&M's Q2 report confirmed that the overall story remains unchanged: weak top-line momentum, but improved profitability driven by internal efficiency measures and external margin tailwinds. While we welcome margin-driven earnings growth, we continue to stress the importance of reigniting revenue growth to achieve long-term sustainable earnings growth, particularly as we expect the margin tailwinds to fade in H2'26. We still consider valuation levels elevated given the ongoing top-line concerns, which were not eased by the modest June guidance of flat growth. Against this backdrop, we continue to view the risk/reward as unattractive and reiterate our Sell recommendation and target price of SEK 150 per share.

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.

Margin progress, but the growth question lingers

H&M continued to struggle to grow sales in Q2, with revenue in local currencies roughly flat year-on-year. While growth is still held back by a smaller store base (3% fewer stores at quarter-end), we believe the main explanation lies in the brand's lack of traction, where H&M needs to revitalize the brand to drive sales. On profitability, gross margin rose to 56.6% in Q2'26, roughly in line with both our and consensus forecasts. The company attributes the improvement primarily to internal factors, notably ongoing supply-chain efficiencies from consolidating volumes with fewer, more efficient suppliers. External factors were slightly net positive. H&M again showed solid operational cost discipline, supported by logistics efficiencies, store portfolio optimization and more efficient marketing. On a reported basis, Q2 EBIT was weighed down by some 649 MSEK in one-off restructuring costs, leaving reported EBIT below both our and consensus forecasts.

Small cuts now, but the burden of proof sits with H2

We have trimmed our revenue estimates, mainly for 2027-2028, as the company's strategic growth initiatives have yet to materialize, prompting a more cautious stance. H&M continues to lag peers with a clearer market positioning: Inditex has succeeded on the back of a higher degree of fashion and best-in-class trend responsiveness, while, e.g., Primark and Shein have succeeded in the ultra-fast-fashion, low-price space through online trend monitoring and small-batch testing. We believe H&M lacks a similarly clear position, and we would like to see it define more explicitly the segments in which it has the potential to expand. On costs, we see the gross margin tailwind fading as supply-chain efficiencies mature in H2'26. Freight and raw material price increases have not yet hit the company, but we view them as a risk to margins unless passed through via pricing. H&M has shown solid operating cost control through store optimization, inventory productivity, and more efficient marketing. However, we expect OPEX to rise in H2'26 on the phasing of technology investments, in line with guidance.

We still believe that the valuation is stretched

In our view, the valuation multiples are still on the high side in absolute terms (2026e P/E: 21-22 and EV/EBIT: 17x), above H&M’s long-term medians. Our DCF model and relative valuation paint a similar picture. While H&M’s strong brand and healthy balance sheet are supportive, limited visibility on a sales turnaround and a mixed track record lead us to believe that the current elevated valuation multiples are unwarranted. As such, we view the risk/reward as unattractive and prefer to wait for more compelling entry opportunities.