Falling US inflation needed to support market

For once, H&M surprised the stock market positively in Q1 2024, reported on 27 March. H&M's EBIT came in at SEK 2077 million in Q1 2024, compared to the average analyst estimate of SEK 1355 million (i.e. 53% better). Meanwhile, sales of MSEK 53,669 were in line with the average estimate of MSEK 53,465.   

With a new CEO, the company should achieve an operating margin of 10% for the full year 2024. In that case, despite a recovery in recent months, H&M shares would trade at a 30% discount to its peers. The peer group consists of Inditex, TJX Companies, Zalando, Fast Retailing, Ross Stores, GAP, Burlington Stores, Abercrombie & Fitch and American Eagle Outfitters and the Price-to-Earnings (P/E) ratios are according to Capital IQ.           

                                                             
If we look at H&M's Q1 2024 report and compare the company's performance over the past twelve months, we can see an improving trend. Despite the lack of growth, the gross margin has improved from 47% in Q1 2023 to 51% in Q1 2024. At the same time, the operating margin was 3.9% in Q1 2024 compared to 1.3% in Q1 2023.
On a rolling full-year basis, this means that the operating margin has increased from 5.3% on 30 November 2023 to 5.9% on 28 February 2024. According to the new CEO Daniel Ervér in his Q1 2024 commentary, the target is a 10% operating margin for the full year 2024. This does not seem impossible as one of the main competitors, Inditex, has a gross margin of 54% but an operating margin of 22%. What H&M needs to reduce is its cost of sales, which is still high at 41% over the last twelve months.

As a result of the low earnings in 2023 (earnings per share of SEK 5.35), this was lower than the dividend to shareholders of SEK 6.50 per share. The dividend represents a yield of almost 4% on the current share price. If H&M could improve its operating margin to 10%, the company's earnings per share would rise to around SEK 8.80 per share and there would be an opportunity to start buying back shares in the company in addition to the dividend.

In the last three quarters of 2023, H&M bought back only around 0.5 million shares. The buyback of H&M shares then increased to just over 12 million shares in the first quarter of 2024. If H&M manages to achieve an operating margin of 10% for the full year 2024, there should be room to buy back another 14 million H&M shares during Q2-Q4 2024, which is just under 1% of the group's total number of shares.

One theory put forward by some investors is that the Persson founding family is in the long-term process of buying H&M back from the Stockholm Stock Exchange. Over the past five years, Stefan Persson's family stake in H&M has increased from 47% to 59%.

H&M's Q2 2024 report is due on 27 June 2024.

H&M (SEK), one-year daily price chart