H&M Q4'24: Risk/reward turns positive

H&M's Q4 results beat our forecasts thanks to a strong gross margin. However, we kept our estimates largely intact and continue to see sales and margin improvement in 2025-26. We see earnings growth and dividends offering a reasonable expected return. We therefore upgrade the recommendation to Accumulate (was Reduce) with an unchanged target price of SEK 160.

Strong gross margin drove Q4 above expectations

H&M's Q4 revenue increased 3% in local currencies but was slightly lower in reported terms due to negative FX effects, landing slightly below our forecast. Gross margin was the main positive surprise in the report, ending up at 54.6%, up 90 basis points year-on-year, despite negative external factors (freight, product costs) and lower prices. Markdowns had a positive impact on the margin (i.e. less markdowns than in the comparison period), which was better than the company had indicated. SG&A (opex) was flat in Q4 and in line with our expectations. However, due to lower-than-expected top line, the opex/sales ratio increased slightly, whereas we had expected it to be flat. All in all, EBIT amounted to 4,624 MSEK, up 7% year-on-year and 17% above our forecast, driven by the strong gross margin. H&M's increased its dividend from SEK 6.50 to SEK 6.80.

Positive sales start for fiscal 2025, as expected

In connection with the Q4 report, H&M announced that revenue in December-January, i.e., 2 months of the fiscal year, increased by 4% in local currencies. This was in line with our previous forecast. Regarding margins, H&M said that it expects a negative impact on gross margin from external factors in Q1, as well as a negative impact from markdowns and pricing. This too was largely in line with our expectations. However, the Q4 performance suggests that the company will be able to at least partially offset the negatives through its own measures. We have made only minor changes to our forecasts based on the Q4 report.

We expect positive revenue and margin trend in 2025-26

During 2025-26, we expect gross margin to remain slightly above 53% (53.4% in 2024) and top-line growth to drive opex/sales lower and thus EBIT margin higher. 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 largest markets (some 15% of revenue), while China accounts around 25% of its sourcing.

Decent expected return turns us positive on the share

H&M's P/E for 2024 is around 20x, while for 2025 the expected earnings growth 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 at 25-30x for 2025-26. We believe some discount is warranted given Inditex's better sales performance, but the gap already looks quite wide. We estimate H&M's free cash flow and dividend yield to be around 4-5% in the coming years. After a stronger earnings improvement in 2025-26, driven by the rising margin, we expect steady sales/earnings growth of 5% in the medium term. The dividend and earnings growth together offer an expected return of around 10%, which is slightly above our required return of 8%. Our DCF value is in line with our target, suggesting some upside for the stock.