H&M Q2'24: Strong Q2, but more margin pressure in H2

H&M’s Q2 was strong as sales grew and EBIT improved y/y and topped our forecasts, although they were in line with the consensus. H&M, however, sees more headwinds in H2 than previously and hence its EBIT margin target of 10% looks more challenging for this year, according to the company. We made only limited estimate changes on the back of Q2 and maintain our Reduce recommendation with a SEK 170 target price.

Q2 figures were strong and ahead of our expectations, but in line with the consensus

H&M reported 3% sales growth in Q2 both in SEK and in local currencies, driven by growth throughout its regions with fastest growth in Eastern Europe. Growth was driven by the H&M brand, while portfolio brands delivered slightly lower sales in Q2, which the company attributed to strong comparison figures. The gross margin was very strong and improved to 56.3% in Q2, well ahead of last year (52.7%) and our estimate (53.5%), but in line with the consensus (56.1%). This was supported by a stabilizing cost environment, good demand supporting full-priced sales and the company’s streamlining measures to improve supply chain efficiency. The 12-month rolling gross margin is now over 53%, up from around 50% still in Q3’23. EBIT showed a notable 50% y/y improvement and topped our forecast by almost 20%, although it was roughly in line with the consensus. We note that the EBIT margin improvement was practically fully driven by gross margin expansion and hence opex/sales were flattish despite the company’s cost-cutting efforts and growing sales.

10% EBIT margin ambition unchanged for 2024, but now looks challenging also for the company

H&M commented that June sales are expected to be down 6%, but it still was fairly positive about the sales trends and prospects in general, looking for mid-single-digit growth in H2. H&M does not give any guidance, but it reiterated the ambition to reach a 10% EBIT margin during 2024. It, however, noted that this looks more challenging now given some cost headwinds and said it depends on boosting the sales growth to a higher level than seen in Q2 (3%). For the last 12 months, H&M has delivered a 7.6% EBIT margin and we don’t believe 10% will be reached this year. Nevertheless, we continue to see a positive margin trend and H&M reaching an EBIT margin of 8.5% in 2024 and around 9.5% in 2025-26. In 2024, this is supported by both an improving gross margin and lower opex/sales thanks to cost efficiencies and growing sales, while in 2025 we see a fairly stable gross margin and further improvement in opex/sales. Estimate changes were minimal in this report.

Share looks fairly valued

H&M’s P/E for 2024 is 19x, which is at the high end of our acceptable multiples. For 2025, the expected margin improvement drives the P/E down to 16x. The multiples are below the closest peer Inditex, which trades at 27x 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 2024-25, driven by the increasing margin, we expect a steady 5% sales/earnings growth in the mid-term. Our DCF value is close to the current share price. Hence, overall, we see the share quite fairly valued.