Morningstar | H&M's Self-Help Initiatives Should Yield Results, but Competitive Landscape Remains Tough
Although we still believe that H&M (the world’s second-largest fashion company in terms of revenue) benefits from scale advantages and brand recognition, we think these are no longer sufficient to guarantee medium- to long-term economic profits in an increasingly competitive environment, hence our no-moat rating for the company. Furthermore, responsive supply chain initiatives seem to no longer be working, as sales faltered and inventory days grew from about 117 in 2015 to 138 days in 2018, while fixed store costs are becoming an increasing drag on profitability as store traffic falls in mature markets.We believe some of the company’s recent troubles can be addressed by closing underperforming stores; speeding up the supply chain through 3D sampling and radio-frequency ID; introducing artificial intelligence to better detect trends and improve personalisation; and investing in improving the quality/price proposition. However, we don’t think the competitive environment is getting any more benign. While H&M can still gain share from weaker incumbents, we expect it to be harder than it used to be as fitter, more focused competition continues to emerge (low-cost companies like Primark, discount firms, niche brands, and private-label offerings at Amazon or Alibaba, for example). We expect the group to grow at 5.3% on average over the next 10 years, with 3.8% growth in the core H&M brand (just marginally ahead of the industry’s low-single-digit increase) and 14% average annual growth for new concepts. We expect gross margins to remain flat, as discounting should abate through gradual product mix improvement, offset by needed increased investments in the quality/price proposition. Further, investments in technology, e-commerce, and operations for newer brands will dampen margin expansion, despite improved H&M store-base costs in the developed markets. We expect operating margins to improve to 2017's 10% level by 2023, after dipping to 7% through 2019-20.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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