On Wednesday, HSBC analyst adjusted the price target for Hennes & Mauritz AB (HMB:SS) (OTC: HNNMY), commonly known as H&M, to SEK185 from the previous SEK190. Despite this reduction, the firm continues to recommend a Buy rating for the retailer's stock.
The adjustment reflects a nuanced outlook on the company's financial prospects, grounded in several key factors anticipated to influence its performance going forward.
The analyst from HSBC forecasts a cyclical upturn in discretionary spending within key European markets, which represent a significant portion of H&M's sales, starting from the fiscal year 2025.
This expected increase in consumer spending is considered a positive driver for the company's revenue. Additionally, the analyst anticipates a potential gross margin recovery, which could be facilitated by a higher rate of full-price sales.
H&M's management has been credited with implementing effective measures that have begun to yield benefits. These include improvements in supply chain efficiencies and operational expenditure savings, which are contributing to gross margin recovery. Furthermore, sales of the core H&M brand have shown positive momentum from the second quarter onwards, indicating a return to growth.
The company is also in the process of enhancing its operational flexibility through a more adaptable supply chain, which includes increased near-shoring. These strategic moves are expected to provide further advantages to H&M.
Moreover, the retailer is investing in its physical store presence and rolling out a new digital platform, both of which are anticipated to contribute to its financial targets.
In light of these developments, HSBC believes that H&M is on track to meet its long-standing goal of a 10% EBIT margin, now projected to be achieved in the medium term. Despite the slight decrease in the price target, the firm's outlook for H&M remains optimistic based on the retailer's strategic initiatives and expected market trends.
InvestingPro Insights
To complement HSBC's analysis, InvestingPro data provides additional context for H&M's financial position. The company's market capitalization stands at $26.37 billion, reflecting its significant presence in the specialty retail industry. H&M's P/E ratio of 27.08 suggests that investors are willing to pay a premium for its earnings, which aligns with the positive outlook on the company's future performance.
InvestingPro Tips highlight that H&M is trading at a low P/E ratio relative to its near-term earnings growth, with a PEG ratio of 0.44 for the last twelve months as of Q3 2024. This indicates that the stock may be undervalued considering its growth prospects, supporting HSBC's Buy rating. Additionally, H&M operates with a moderate level of debt, which could provide financial flexibility as it invests in its digital platform and store presence.
The company's revenue for the last twelve months as of Q3 2024 was $22.88 billion, with a gross profit margin of 53.22%. While revenue growth has been slightly negative (-0.37% over the same period), the high gross margin suggests that H&M maintains strong pricing power, which could support the anticipated gross margin recovery mentioned by HSBC.
For investors seeking more comprehensive analysis, InvestingPro offers 5 additional tips that could provide further insights into H&M's investment potential.
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