H&M Earnings: Margins Improve on the Back of Cost Reductions; Sales Stay Weak

Key Morningstar Metrics for Hennes & Mauritz

• Fair Value Estimate
  : SEK 169
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Hennes & Mauritz’s Earnings

H&M released its third-quarter results today, reporting 1% local-currency sales growth and an operating margin of 9%, excluding one-offs. Full-year SG&A reduction guidance was narrowed to the lower end of the range amid rising cost pressure heading into the fourth quarter.

Why it matters: Our investment thesis mainly hinges on H&M’s potential to reduce operating costs by closing underutilized stores and thus improving profitability, while we see limited headroom for price increases and remain skeptical of improved in-season sales.

• This quarter’s results support our thesis. The operating margin improvement came mainly from selling, general, and administrative expenses, which fell 4% and matched our forecasts, rather than from gross margin gains driven by pricing or lower markdowns.
• Although H&M’s local-currency sales growth of 1% in the quarter (flat over nine months) is weak, it falls squarely within our expectations. The result nonetheless underscores that H&M continues to lag its competitors Inditex and Fast Retailing, which reported high-single-digit growth over the same period.

The bottom line: We maintain our SEK 169 fair value estimate of no-moat H&M as results largely align with our expectations.

• We believe H&M will struggle to meaningfully reduce markdowns going forward. Markdown levels were unchanged this quarter, while management has guided to higher markdowns in the quarter ahead. This reflects tough price competition in fast fashion, at a time when consumer purchasing power remains limited.
• In line with today’s results, we expect H&M’s portfolio brands, rather than the core H&M brand, to drive sales growth above the group’s 10-year average in 2027 and 2028.