Like other companies in the space, we are concerned that H&M’s massive store footprint (4,739) and assortment/experience challenges are weighing on performance as demand shifts online. Management is addressing the problems through slowing future store growth (7% net growth in 2018 versus a three-year average of 11%), refocusing on the core, investing in technology, and growing new brands, geographies, and online. That said, we remain concerned about continued store openings given suffering like-for-like sales and feel that new brands will contribute little to overall growth in the near-term with H&M accounting for over 90% of the store base. Further, we acknowledge that the Dividend Reinvestment Plan will free up some cash for necessary investments (dividend payments were SEK 16 billion in fiscal 2018), however this proposal could be dilutive to earnings per share as new shares are issued. Therefore, we are lowering our SEK 186 fair value estimate to SEK 133. We now see revenue growth averaging 2% annually over the next five years versus 5% in our prior model with store growth at 5% annually versus 10% prior. We have also lowered our operating margin to high-single digit levels on average annually versus low-double digit levels prior to incorporate new investments. With shares trading near our updated fair value and details on recovery opaque at this point, we would remain on the sidelines.
H&M’s fourth quarter revenue declined 4% on 9% store growth. Online sales and newer brands performed well but weakness in H&M’s physical stores where traffic was challenged and brand assortment was weaker weighed on results. Gross margin was also a concern. Markdowns in relation to sales increased by 1.3% in the fourth quarter while purchasing currencies and raw materials were slightly negative during the purchasing period. Going forward, we expect elevated inventory levels to remain a concern and management estimates that this is expected to lead to an increase in markdowns relative to sales of approximately 1.5 –2.0 percentage points in the first quarter of 2018. As such, we expect gross margin to decline 170 basis points to 52.3% in fiscal 2018.
Notatet ble først publisert 31.1.2018 på Morningstar Select. Denne inneholder meninger, oppfatninger og subjektive vurderinger av nåtid og fremtid. Fremtiden er usikker av natur og analytikerne kan endre oppfatning som følge av ny informasjon eller annet. Informasjonen er ment til utdanning og ikke som et tilbud eller anbefaling til kjøp eller salg av verdipapirer. Forhør deg alltid med en finansiell rådgiver før kjøp og salg av verdipapirer.
