H&M - a sinking ship or great potential?

H&M - a sinking ship or great potential?

05 February 2019 from Anna Svahn

When H&M's report for the full year 2018 was released, many questions were left unanswered. The fact that they chose not to lower the dividend even though it corresponds to 200 per cent of the company's free cash flow was not the case for many who raised their eyebrows, but how is it that the stock is still growing, and it does matter if net sales increase when profits de facto fall?

It is unthinkable to imagine that a company that made profit year after year and classified as one of the Stockholm Stock Exchange's "safest" companies could potentially make a loss in the future, but it is nevertheless something that we should consider as possible outcomes on the trend of the clothing giant in terms Falling profit will last. It is possible to say a lot about H&M, in addition to falling profits, the company has also exhibited major problems with its stock that continues to grow. Despite this, the management once thinks the inventory mainly consists of high-quality collections that will not have to be cleaned out. If one had only gone to the management's own words, it would have been easy to be optimistic about the future, but the figures speak of a completely different reality.

During Hennes & Mauritz's heyday there were many savings economists and experts who advised ordinary small savers about the share that "could not go down". However, since top levels in 2015 of SEK 368 per share, the price has fallen by over 60 percent. However, for dividend hunters, the decline seems to play a lesser role, since the only thing that matters is the direct yield, the lower the share price, the higher the direct yield - as long as they actually do not lower the dividend thus - which they do not seem to do in the first place.



But what is it that attracts H&M in their latest report? In the short term, most seem to be stuck to the fact that the big owner Stefan Persson will continue to buy shares. Let us take a look at how H & M's development actually looked over the last few years and what forecasts we can make for coming years.

Net sales

In recent years, H & M's net sales have not increased to the extent that the company itself guided it. Every year, H&M says that the goal is to grow by 10-15 percent in local currency, but it was long before they actually reached their own (and high) goal. Instead, we have been able to see growth of 2-3 percent in recent years, which is still a great deal for a company in H & M's size. Hoping that H&M would increase its growth in the coming years would have been high hopes, so in the forecasts below for 2019 and 2020 we expect a net sales growth of 3 percent per year.



Gross margins

H & M's gross margin also leaves much to be desired and in recent years has gone from over 59 percent to 52.7 percent for 2018. H&M itself flags for continued increased costs, both because they are launching more and more brands and because they are establishing themselves in new markets. It is not unreasonable to think that the margin will continue to fall even in the coming years.


Results

Perhaps the most important item to look at is H & M's actual results. Despite the fact that online sales that they have focused on in recent years are increasing (which is positive), profits actually fall. Since 2015, when H&M reported a profit of almost SEK 21 billion, profit has fallen by 39 percent.


It is not unthinkable that H&M's negative trend continues. If the growth also fails or even ends with red figures, as I mentioned earlier in the article, it is not unreasonable that in a few years, if the trend persists, see the loss quarter or even years.

If we’re boing optimistic

It would have been easy to stay there, to finish the article with a long-term sales recommendation based on falling profits and sluggish growth. But the fact is that some positive signs can actually be found that H & M's future may be bright anyway. Online sales are increasing and currently account for 14.5 per cent of the H & M Group's total turnover compared to last year's 12.5 per cent. Although the company has problems with falling margins, it is reasonable to believe that they do not fall below 51 per cent, which would mean that the downside is less now than before. In addition, H & M's choice not to lower the dividend, even though it represents 200 percent of the free cash flow, could be interpreted as meaning that the company itself considers that the turnaround is so close that a reduction had been unnecessary. … Or borrowed money for dividends only gives Stefan Persson a chance to buy out the company cheaply from the stock exchange with long-term buy-out plans.


@Anna Svahn

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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capitalprotected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.

19/04/2019 19:03:16

 

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