H&M Q1'26: Muted sales growth overshadows margin gains

In our view, H&M’s Q1 report did not contain any major surprises. The overall narrative remains unchanged; the company continues to struggle to drive sales growth, while margin improvement is primarily supported by internal initiatives and external factors rather than top-line momentum. In our view, valuation levels remain elevated, and given the ongoing revenue concerns, we continue to view the risk/reward as unattractive. As a result, we reiterate our Sell recommendation and our target price to SEK 155 per share.

Investment case relies on increased sales growth

In our view, H&M's investment case hinges on product and brand investments that strengthen the customer experience and drive margin recovery through increased sales. While top-line growth is clearly the biggest positive driver for H&M, the main near-term risks to achieving it are a lack of brand traction and prolonged weak consumer confidence.

Continued weak top-line momentum, margins provide support

As expected, H&M continues to face challenges in driving top-line growth, reporting a decline in sales of -1% in local currencies in Q1, slightly below both our and consensus forecasts. Overall, we view the Q1 sales performance as modest, with the company’s strategic initiatives around product offering and customer experience yet to translate into meaningful revenue growth. The key positive in the report was, once again, profitability. Ongoing supply chain efficiencies continued to support the gross margin, which increased from a low base of 49.1% in Q1’25 to 50.7% in Q1’26. On operating expenses, the company reduced SG&A by approximately 1% in local currencies, and the EBIT margin improved from 2.2% in the prior year to 3.0%, above our expectations. Looking ahead, the key question remains the sustainability of the margin improvement. While margin-driven earnings growth is encouraging, we believe that stronger brand momentum and a recovery in sales growth are critical to supporting long-term earnings expansion.

We have lowered our revenue estimates

Given the weak Q1 sales outcome and the continued lack of clear signs of a rebound, we have reduced our revenue forecasts for the current year by around 2%. Based on our revised estimates, we now expect full-year 2026 sales growth of around 1–2% in local currencies. A more meaningful acceleration is likely to be delayed until late 2026 and into 2027, supported by a gradual improvement in customer response to investments in the product offering and online platform, as well as a potential recovery in consumer confidence. However, we believe that the conflict in the Middle East poses short-term risks, as inflationary pressures from higher energy prices are likely to act as a headwind, affecting both H&M’s cost base and consumer demand.

In the longer term, we continue to expect gross margin expansion toward 54–55%, beyond this level, we anticipate that the company will reinvest incremental margin gains into the product offering to support volume growth. We forecast the EBIT margin to increase from 8.1% in 2025 and stabilize around 9–9.5% over the long term, supported by moderate sales growth and ongoing operational efficiencies.

We reiterate our Sell recommendation

In our view, the valuation multiples are still on the high side in absolute terms (2026e P/E: 21 and EV/EBIT: 17x), above H&M’s long-term medians. Our DCF model and relative valuation paint a similar picture. While H&M’s strong brand and healthy balance sheet are supportive, limited visibility on a sales turnaround and a mixed track record lead us to believe that the current elevated valuation multiples are unwarranted. As such, we view the risk/reward as unattractive and prefer to wait for more compelling entry opportunities.