H&M Q4’24 preview: Margin headwinds persist in Q4

H&M will report its Q4’24 (September-November) results on Thursday at 8:00 am CEST. We expect slightly positive revenue growth both in local currencies and reported terms. However, we expect EBIT to decline year-on-year due to a slightly lower gross margin and stable opex/ sales. We expect a positive top line development for the beginning of the fiscal year 2025.

We expect decent revenue growth in local currencies

In conjunction with its Q3 report, H&M communicated 11% revenue growth in September.  However, we believe that market conditions have been more subdued since then. We expect 4% growth in local currencies, but this will only result in 1% reported growth due to the significant negative currency impact. This 4% growth would still represent the best quarterly growth since early 2022, when growth was strong due to low comparison figures during the COVID period.

Several headwinds on gross margin hitting the earnings

While H&M saw a strong margin improvement during the first half of the year, driven by gross margin increases, the situation changed in Q3, as the gross margin was stable year-on-year, and higher operating expenses significantly reduced the EBIT margin.

For Q4, H&M faces several gross margin headwinds (as previously reported), including lower pricing, increased markdowns, and negative impacts from external factors such as product costs and freight. H&M's efficiency measures will likely offset some of these negative impacts, but we anticipate a gross margin of 53.1% for Q4, down from 53.7% a year ago.  Regarding fixed costs, H&M's earlier efficiency program is fully effective and keeping operating expenses in check, while increased marketing spend, for example, will drive operating expenses up. At the end of Q4, the company announced plans to close its Monki chain, which is expected to result in costs in Q4 of a similar magnitude as the closure of Afound in Q3 (200 MSEK). Overall, we expect operating expenses as a percentage of revenue to remain at last year's level, with moderate top-line growth and efficiency gains keeping costs under control.  Therefore, we expect both the EBIT margin and absolute EBIT to decline year-on-year due as a result of a lower gross margin.

We expect a slight increase in dividend

We expect a slight dividend increase from SEK 6.50 to SEK 6.75. H&M has paid a dividend of SEK 6.50 for several years, which is higher than earnings.  For 2024, we forecast EPS of around SEK 7.00, allowing for a sustainable dividend increase. We expect H&M to pay out most of its earnings as dividends over the long term.  However, the company also occasionally buys back its own shares, so total shareholder returns could exceed dividends. If the company prioritizes share buybacks, the dividend could remain at SEK 6.50.

We expect positive top-line and margin trends in fiscal 2025

While H&M does not provide financial guidance, it will likely publish December and January sales figures with its Q4 report. We expect 3.5% growth in local currencies for Q1’25 (December–February) and 3% growth for the full year of 2025. We expect the gross margin to be slightly above 53% in the coming years, with top-line growth driving down operating expenses as a percentage of revenue and increasing the EBIT margin to around 8% in 2025 and towards 9% in 2026. We believe the company's 10% ambition is challenging to achieve.  Additionally, H&M could be affected by new tariffs between the US and China. The US represents approximately 15% of H&M's sales, while China accounts for about 25% of its sourcing. These tariffs would likely have a negative impact on margins, at least in the short term.