Investing.com -- HSBC analysts cut their rating on H&M (ST: HMb ) shares to Hold from Buy, and adjusted the price target to SEK145 from SEK185, citing an “absence of positive momentum.”
The revision reflects concerns over the time and cost required for H&M’s ’Elevate’ strategy to produce the desired financial recovery. While the Swedish fashion retailer has made some progress, including improvements in womenswear sales and customer experience, as well as increased supply chain flexibility, the full benefits are yet to be realized.
“It is still early days and the fact that management’s previous FY24 EBIT margin target of 10% is now a medium-term target suggests it will be some time before these initiatives deliver the required and sustained uplift in top line growth to drive positive operating leverage,” HSBC analysts led by Paul Rossington said in a note.
Furthermore, store closures are anticipated to outnumber new openings for at least another year, making H&M more reliant on market growth to drive sales. Also, the positive effects of lower interest rates and inflation “will not aid consumption trends” until the end of fiscal years 2025 (FY25) and 2026, given the timing of the company’s year-end.
External factors, such as foreign exchange rates and higher freight rates, are also expected to exert more pressure on the cost of goods sold in the first quarter than in the fourth quarter of the previous year.
“We expect this negative pressure to persist further, into Q2 at least,” analysts said.
These factors, along with the potential need for increased markdowns due to higher inventories, are likely to impact gross margins in the first half of FY25.
Current trading for H&M in the first eight weeks of FY25 has started slower than expected, with currency sales growth at 4%, which is below the consensus estimate of 5%. HSBC expects that comparisons for the remainder of Q1 will be challenging.
HSBC’s revised price target implies a modest upside and a price-to-earnings (PE) ratio of 18.6 times for FY25e, which is below H&M’s five-year historical average forward PE of approximately 21 times, excluding COVID-19 impacts.
While the medium-term margin recovery potential and a net cash balance sheet support the investment case, HSBC expressed the need for a positive turn in earnings momentum before adopting a more optimistic stance.
The next potential catalyst for H&M’s stock is the release of Q1 results on March 27, 2025.