We believe consumer demand has remained subdued in H&M’s Q4 (Sep-Nov), although supply chain efficiencies and external margin tailwinds should support profitability. We have lowered our earnings estimates for 2025 and beyond, but margins remain broadly intact, reflecting our confidence that H&M will continue to demonstrate strong cost control. We continue to see the share as expensive at current valuations and maintain a Sell recommendation.

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, the direct negative impact from tariffs and prolonged weak consumer confidence.

Growth continues to lag, but margin recovery lies ahead

H&M indicated in its Q3 report that September sales in local currencies were roughly flat, reflecting tough comparisons (+11% in September 2024). We believe October sales were soft due to weakness in key markets such as Germany, the US, and the UK, with some improvement in November supported by colder weather and the earlier timing of Black Friday, which should add around 0.5 percentage points to November growth. Overall, we forecast Q4 local-currency revenue growth of 1%, but due to a negative FX impact of around -6% from a stronger SEK, reported revenue is estimated to decline by -5%, slightly below consensus. As for margins, while tariff impacts are expected to be more negative than in Q3, we still forecast a gross margin improvement to 55.4% in Q4’25 (from 54.6% in Q4’24), supported by supply chain efficiencies, lower freight costs, and USD weakness, partly offset by higher markdowns. Continued cost control and the non-repeat of Monki wind-down costs (~200 MSEK in Q4’24) should more than offset FX-related OPEX deleverage, driving EBIT to 5,238 MSEK and lifting the EBIT margin to 8.9% (from 7.4%).

We have lowered our estimates

We believe H&M’s strategic initiatives around product and customer experience are well founded but have yet to translate into meaningful sales growth. Consumer demand remains subdued, and risks persist in the US (~13% of sales), as tariff-driven price increases peak into early 2026 and costs may not be fully passed on. Consequently, we have adopted a more cautious stance and lowered our mid-term growth assumptions by around 3%. However, external gross margin factors have improved, and we believe that recent strong cost control will continue, limiting the impact on earnings estimates, which are reduced by around 1-3%. Overall, we continue to expect gradual margin improvement, with mid-single-digit revenue growth and operational efficiencies driving EBIT margin expansion from 7.4% in 2024 to around 9% in 2027.

Expensive at current valuations

In our view, the valuation multiples are high in absolute terms (2026e P/E: 21x and EV/EBIT: 18x), above H&M long term medians. Our DCF model and relative valuation paint a similar picture. While H&M’s strong brand and healthy balance sheet are convincing, there are still topline concerns, and we believe that in the still uncertain operating environment, overstretched multiples are unwarranted. Hence, we believe that the risk/reward is weak.