Hennes & Mauritz AB: A Bear in the Swedish Woods

H and M Rendering

Firstly, we briefly present H&M business. Secondly, we provide a report of recently announced Q1 2017 results. Thirdly, we perform a DCF and multiples valuation to find a target price for H&M, in line with recently announced results. Finally, we will explore a strategy to profit from our analysis.

H&M: business snapshot                             

Hennes & Mauritz AB (H&M) (Bloomberg: HMB SS / NASDAQ Stockholm: HMb) (Friday 7th April closing price of SEK 218.30, market cap of SEK 361.302bn, 1,655.072m shares[1], no minorities) is a Swedish fashion retailer with operations all over the world which designs and retails clothing for women, men, teens and children. The company sells a variety of trendy, sporty, and classic garments in addition to accessories such as jewelry, bags, and scarves, and cosmetics. It designs cheap yet chic clothing, mainly for men and women ages 18 to 45, children’s apparel, and its own brands of cosmetics. Analysing briefly the value chain, H&M designs and sells the collections but it outsources manufacturing to independent external suppliers. H&M’s first store was opened in 1947. Now, it employs more than 161,000 people all around the world. H&M focuses a lot on employing a sustainable business model, using 43% of recycled cotton in FY 2016 and having a 100% target within FY 2020, as part of its project to build a circular value chain with minimized waste.

H&M sells through its stores and via its website. As of Q1 2017, H&M has 4,393 stores in 64 markets and e-commerce in 35 H&M markets. During FY 2016[2], H&M continued its strategy of expanding its physical presence by opening 427 new stores worldwide: 7 in the Nordic Region (Sweden, Norway, Denmark and Finland), 71 in the Eurozone (Germany, France, Italy, Spain, Netherlands, Austria, Belgium, Greece, Portugal, Ireland, Slovakia, Slovenia, Luxembourg, Estonia and Latvia), 32 franchise stores and 317 in the rest of the world (RoW) (with main focus on China, with net openings of 91 stores, USA, net openings of 53 stores and UK an Russia, both with 17 net openings). This trend kept on during Q1 2017, with 42 net openings worldwide, mainly driven by 50 net openings in franchise and RoW (16 in the USA, 11 in China and 5 in Russia). This expansion trend has been contrasted by 8 stores closed in the European region, especially 4 in Sweden, 4 in Germany and 3 in France.

H&M Report - Grafico 1Chart 1: Evolution of H&M stores, 2012-LTM (source of chart data: Bloomberg, company data, BSIC)

We can see that in the last 5 years, H&M followed a clear strategy of international expansion in extra-European countries, with the main objective of tapping emerging markets’ growth potential for what concerns the clothing market and to establish a stronger presence in the USA. As we see from Chart 1, in a 5 year time there was almost no net expansion in terms of stores in the Nordic region, proof of the fact that that market is mature. In the Eurozone, the highest net openings have been in Italy (+64), France (+53) and Germany (+49).  Overall, during the last 5 years the number of brick and mortar stores has been growing at 9.4% CAGR (from 2,776 in 2012 to 4,393 LTM). This investment has been accompanied by a growth in the number of employees at a 9.65% CAGR.

In Q1 2017, reported on March 29th, H&M registered[3]:

  1. LTM sales of SEK 195,561m (5-year CAGR 10.01%, YoY growth 6.12%)
  2. LTM gross profit of SEK 107,944m (5-year CAGR 8.43%, YoY growth 4.14%, GPM[4]20%)
  3. LTM EBITDA of SEK 31,604m (5-year CAGR 4.65%, YoY growth -1.96%, EBITDA margin 16.16%)
  4. LTM EBIT of SEK 23,712m (5-year CAGR 2.11%, YoY growth -7.28%, OPM[5]13%)
  5. LTM net income of SEK 18,495m (5-year CAGR 2.20%, YoY growth -6.73%, NPM[6]46%)


The company operates through 7 brands: H&M, H&M Home (which are aggregated for reporting purposes), COS, Monki, Weekday, & Other Stories and Cheap Monday. Furthermore, as hinted by CEO Karl-Johan Persson, the 8th brand Arket will open in autumn 2017. Chart 2 shows the number of stores split by brand.

H&M Report - Grafico 2Chart 2: Number of stores by brand, Q1 2017 (source of chart data: Bloomberg, company data, BSIC)

Chart 3 below shows the split of sales by region and the average sales per store for each region.

H&M Report - Grafico 3
Chart 3: Sales by region and average sales per store, 2012-LTM (source of chart data: Bloomberg, company data, BSIC)

RoW has surpassed Eurozone as the main revenues source during the last 5 years. Furthermore, we can see how Eurozone and the Nordic region maintain their primacy in terms of average sales per store. In terms of revenues, the top 5 markets are Germany (16.31% of LTM sales incl. VAT), USA (12.05% of LTM sales incl. VAT), UK (6.58% of LTM sales incl. VAT), France (6.05% of LTM sales incl. VAT), and China (4.99% of LTM sales incl. VAT), for a total of 45.98%.

For what concerns the financial position of H&M, it is a very safe company, with negative net debt of SEK -6,579m (LTM). The components are: SEK 9,446m cash and equivalents; SEK 2000m of ST interest bearing debt issued to Nordic lenders (bearing a rate of -0.15% to -0.10%); SEK 68m ST issued to non-nordic lenders (9% average rate); SEK 59m ST financial lease debt (0.28% to 0.53% rate); SEK 213m LT financial lease (3% rate), SEK 527m LT pension liabilities.

The profitability of the company has slowly deteriorated in terms of margins during the past 5 years.

H&M Report - Grafico 4Chart 4: Key profitability margins, LTM, 5-year trailing period Feb-Feb (source of chart data: Bloomberg, company data, BSIC)


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All the views expressed are opinions of Bocconi Students Investment Club members and can in no way be associated with Bocconi University. All the financial recommendations offered are for educational purposes only. Bocconi Students Investment Club declines any responsibility for eventual losses you may incur implementing all or part of the ideas contained in this website. The Bocconi Students Investment Club is not authorised to give investment advice. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication by Bocconi Students Investment Club and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. Bocconi Students Investment Club does not receive compensation and has no business relationship with any mentioned company.

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[1] 1,460,672,000 class B shares, listed and floating (1 vote per share) + 194,400,000 class A shares, non-listed (10 votes per share), with the founding Persson family holding 38.5% of total shares giving them 70.1% of voting rights.

[2] H&M FY ends at the end of November.

[3] LTM numbers based on BSIC estimates, sources of data Bloomberg, company data

[4] GPM = Gross Profit Margin

[5] OPM = Operating Profit Margin

[6] NPM = Net Profit Margin