Morningstar | H&M Profit Affected by Online Investments, but Sales Solid; Maintaining FVE
We are maintaining our fair value estimate of SEK 153 for H&M shares as the company reported first-quarter results. Revenue growth was 4% in constant-currency terms (10% in kronor) versus our expectations for 4.3% full-year constant-currency growth. Sales at constant currency excluding the transition to the new online platform in Germany grew 6% in the quarter and 7% in March. Online sales grew 18% in the quarter but 27% in local currencies if the online transition in Germany is excluded.Gross margin improved slightly from 49.9% in the first quarter of 2018, boosted by fewer markdowns in the quarter. We expect H&M to continue to reinvest in the customer quality/value proposition, so we don’t expect significant gross margin improvement even as the company works through its inventory overhang and levels of markdowns are reduced. We expect largely flat gross margin in 2019. Selling and administrative expenses came at 48% of sales versus 47% last year, affected by continuing investments in online capabilities. We continue to expect selling and administrative expenses to grow faster than sales this year, as the company is in the midst of investments in online and operating capabilities. We expect those to start scaling positively from 2021 onwards.
Inventories increased 14% versus a 10% increase in sales. However, the company expects a further decrease in discounting in the second quarter due to inventory composition being predominantly new seasonal items.
H & M Hennes & Mauritz is engaged in the sale of clothing and cosmetics in Sweden and internationally. Co.'s stores offer basics, tailored classics, sportswear, and maternity clothes for women; basics, leisurewear, and seasonal fashions for men; denim and street fashions; and fashion wear for children and teenagers, as well as accessories, underwear, and shoes. Co. also provides makeup and body care products; and home fashion products, which include interior textiles for the bedroom, bathroom, living room, and kitchen. Co. has approximately 3,132 stores, including 110 franchise stores, 85 COS stores, 79 Monki stores, 21 Weekday stores, 8 & Other Stories stores and 3 Cheap Monday stores.
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