H&M Q3'24: Margin recovery more sluggish than expected

H&M delivered weaker-than-expected earnings for Q3. While September sales growth was a positive data point, we see margin headwinds continuing in Q4 and do not expect the company to reach its 10% EBIT margin target in 2025 either. We maintain our Reduce recommendation and target price of SEK 170. 

Q3 earnings were below expectations

H&M reported flat sales in local currencies y/y, just below our and consensus forecast of 1 %, while reported sales growth was -3 %. Q3 gross margin of 51.1% was well in line with expectations and just above the previous year (50.9%). ”External factors” had a negative impact as well as pricing, which were mitigated by efficiency measures in the supply chain. EBIT, however, fell clearly below last year (4.7 BNSEK) and expectations to only 3.5 BNSEK. This was impacted by ”long-term” marketing costs, as well as the winding down costs of Afound, a small digital-only chain. Furthermore, some FX impacts burdened the result. We would however view only the Afound-related costs, which were no more than 250 MSEK, as a pure one-off, while other items are more part of the business, even if perhaps impacting Q3 more than an average quarter. Hence, overall the Q3 result was disappointing.

Strong sales start to Q4, but margin pressure prevails

H&M announced that it expects September sales to be up as much as 11%. While this was noted to be partly due to weather/seasonal variation, the company also highlighted a good reception of its fall collections. The demand was supported by increased marketing spend as well as lower prices. H&M also expects the ”external factors” to continue to be negative y/y in Q4. On the back of this, we slightly increased our Q4 sales estimate and now see 5% local currency growth. We expect the Q4 gross margin to decline y/y to 53.0% (from 53.7%), but sales growth to drive the EBIT margin to be in line with the previous year at around 7%. In total, we cut the 2024 earnings estimates by 8%, while for 2025-26 cuts were only 1-2%.

10% EBIT margin ambition pushed to be long-term, looks challenging for 2025 in our view

H&M had an ”ambition” to reach its 10% EBIT margin target already in 2024. In the Q3 report it said that the target will not be reached this year due to more negative external factors hitting the margin and consumer demand remaining soft. This was well expected, as our and consensus estimates were already around 8% ahead of Q3. With the EBIT margin being lower in Q3 y/y, we now forecast only a 7.3% EBIT margin. The company did not want to commit to the 10% target for 2025, but rather just make it a long-term target. We believe this supports our thinking that 10% is a challenging target also for 2025 and is not likely to be reached (we expect 8.9%).

Share continues to look fairly valued

H&M’s P/E for 2024 is 24x, while for 2025, the expected margin improvement 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 30x for 2024. We believe some discount is fair, given Inditex’s better sales development. We estimate that H&M’s free cash flow and dividend yields are around 4% in the coming years. After a larger earnings improvement in 2024-26, driven by the increasing margin, we expect a steady sales/earnings growth of 5% in the medium term. Our DCF value is in line with our target and close to the current share price. Therefore, overall, we see the share as quite fairly valued.