Morningstar | We Are Raising Our FVE for H&M Shares to SEK 147 per Share as Operating Performance Improves
We are increasing our fair value estimate for H&M shares to SEK 147 per share following faster-than-expected improvement in operating performance and currency tailwinds. We view shares as trading at a moderate premium to our fair value estimate after gaining around 35% since their September lows.Our fair value estimate increase stems from higher expectations for core H&M brand growth this year and next. We still expect that growth improvement will come at a cost (notably price and quality investments and investments in online infrastructure development); hence, we make no adjustments to our margin expectations. We still expect operating margin to decline to 8.3% before improving to over 10% in the long term as like-for-like sales improve and the cost base is trimmed (through selective store closures and rental cost reductions). We don’t foresee gross margin improvement despite lower discounting going forward as the firm invests in better value propositions for its clients, using its cost advantage against peers to gain market share. We retain our assumptions that the H&M group will gain market share in the medium to long term in the highly fragmented global apparel market.
H&M’s third-quarter sales saw improvement and market share gains in markets unaffected by the logistics systems transition. Notably, sales in Germany, H&M’s biggest market, grew by 6% in local currencies, despite a store count reduction, while sales in China grew at a double-digit pace in local currency, and Eastern Europe and Russia showed strong performance as the firm gained market share in those regions. Logistics systems transitions in USA, France, Italy and Belgium cost the company SEK 400 million in the quarter. Disappointingly, stock in trade continued to outpace sales in the third quarter with a 12% constant-currency increase versus 4% constant-currency growth in sales. Nonetheless, management expressed confidence about the better composition of stock compared with the prior year.
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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