H&M reported its Q1'24 (Dec-Feb) results on this morning. Sales declined largely as expected, but earnings surprised positively thanks to stronger than expected gross margin improvement. Sales have developed positively in March, which is slightly better than our forecast. We expect positive estimate revisions on the back of the report, although Q1 is seasonally the smallest earning quarter. 

Sales declined 2 % both in local currencies and SEK

The company had announced in its Q4 report the sales for Dec-Jan, ie. 2/3 of the quarter, which was down 4 % in local currencies. The sales had picked up somewhat more in February than expected and Q1 sales ended up down only 2%. The sales showed a clear increase only in Eastern Europe.  

Margins improved clearly year-on-year from a low comparison and beat expectations

H&M’s gross margin improved to 51.5% from 47.2% thanks to tailwind from “external factors” ie. costs coming down as well as efficiency measures. Markdowns had around 0.5pp negative impact y/y. Gross margin improvement was hence clearly higher than expected by us or the consensus, even if a notable improvement was expected from the weak comparison period. Opex was slightly higher than we expected, although down 2 % in local currencies, meaning flat opex/sales ratio. EBIT improved to over 2bn SEK compared to slightly negative EBIT a year ago when excluding an one-off related to Sellpy. The positive surprise on EBIT corresponds to some 3 % of estimated full-year earnings as Q1 is a seasonally slower quarter.

Q2 off to a positive start, positive estimate revisions likely

H&M commented that so far March sales are up 2 % in local currencies, which is better than our estimate of flat sales for Q2. The company also comments that external factors are expected to be positive for the gross margin in Q2, while markdowns are expected to increase somewhat. On the back of strong Q1 gross margin, we see room for positive revisions in the gross margin level for 2024.

H&M does not give financial guidance but has earlier said that it is targeting a 10% EBIT margin in 2024. This was however not mentioned in the Q1 report. We have forecasted an 8.4% EBIT margin for 2024, so we would not be surprised to see more cautious comments around the margin target or pushing it forward eg. to 2025 or targeting it in end-24 rather than for the full-year. The better than expected Q1 is likely to drive 2024 estimates higher however.