We believe that the headwinds to gross margins, including price investments, increased markdowns, and negative impacts from external factors, have been stronger than earlier anticipated in H&M’s Q1 (Dec-Feb). As a result, we have lowered our earnings estimates. However, we still see earnings growth and dividends offering a good expected return, which, coupled with the declining valuation since our last research update (share price -9%), keeps the risk/reward ratio on the right side. Consequently, we reiterate our Accumulate recommendation but lower our target price to SEK 150 per share (prev. SEK 160) due to lower estimates.

We expect continued headwinds to gross margins in Q1

H&M previously announced, alongside its Q4 report, that it had a strong start to Q1, with December–January sales rising by 4%. However, this figure was boosted by a favorable Black Friday timing effect, and we estimate the underlying sales growth to be around 2–3%. Additionally, as February last year was a leap year, we expect February 2025 to be negatively impacted by one fewer trading day. Overall, we forecast approximately 2% revenue growth in local currencies for Q1, with reported growth of 4% due to a positive FX impact.

On gross margin, H&M will continue to face several gross margin headwinds, including price investments, increased markdowns, and negative impacts from external factors such as FX and freight. While we anticipate that H&M's efficiency measures will likely offset some of these negative impacts, we estimate the gross margin to decrease from 51.5% last year to 50.9% in Q1’25.

In terms of fixed costs, we expect continued good cost control due to its efficiency measures. Additionally, we note that H&M booked a 161 MSEK one-off cost in Q1’24 related to cost-saving measures, which will provide a positive tailwind in Q1’25. However, we expect increased marketing investments to drive operating expenses up. Overall, we expect operating expenses as a percentage of revenue to decrease slightly compared to last year's level, which, together with some top-line growth will help offset the negative effect from a lower gross margin. H&M will report its Q1 results on Thursday, March 27th.

Lower estimates, but still positive revenue and margin trend in 2025-27

For 2025-2027, we have adopted a more cautious approach to our revenue growth estimates and margin outlook, given our expectations of a slower recovery and risks related to U.S.-China tariffs. The U.S. accounts for approximately 15% of H&M’s revenue, while China represents about 25% of its sourcing. In our view, there is a risk that tariff costs cannot be passed on to consumers without significantly impacting sales volumes, at least not immediately. Nevertheless, we still anticipate mid-single-digit growth over the medium term. Given our expectation of a relatively stable gross margin in the coming years, this should provide some operational leverage. Therefore, we expect the EBIT margin to gradually improve from 7.4% in 2024 towards 9% in 2027. H&M continues to target a long-term EBIT margin of 10%, which we expect will be challenging to achieve given the current outlook.

Still good expected return at current valuation

H&M's P/Es for 2025 and 2026 are 18x and 14x, which is below H&M’s historical trading levels, considering the 10-year and 5-year medians of around P/E 20x. Also, from an EV/EBIT perspective (2025: 15x, 2026: 13x) the company's multiples look relatively attractive, given that the earnings turnaround that we forecast materializes. In our view, the expected earnings growth and dividend provide a solid total expected return above our required return. Our DCF is also in the green, in line with our target price, suggesting some upside. Overall, we therefore consider the risk/reward/ratio as good.