H&M Q3'25 preview: Valuation reflects high expectations

We have made slight downward revisions to our short- and medium-term forecasts for H&M, in light of a slower recovery than our expectations. While we recognize that external factors on the gross margin have moved in a positive direction, we believe that the short-term drivers remain weak, with topline concerns and an uncertain operating environment. Since our last update following the Q2 report, the share price has risen by around 15%, resulting in elevated absolute valuation multiples (2025e P/E: ~24x) and leaving limited room for disappointment. Consequently, we turn to a Sell recommendation (prev. Reduce) but reiterate our target price of SEK 130 per share.

Investment case relies on increased sales growth

In our view, H&M's investment case depends on product and brand investments to strengthen the customer offering and drive a sales-driven margin recovery. While the biggest positive driver for H&M is clearly top-line growth, the main near-term risks to achieving this are a lack of brand traction, direct negative impact from tariffs and weak consumer confidence.

Soft Q3 sales, but margins hold up

In connection with its Q2 report, H&M communicated that it expected 3% revenue growth in local currencies in June. However, this includes an approximate one percentage point negative calendar effect. Even when adjusting for this, the sales growth was not particularly encouraging, given the weak comparison figures (-6% in June last year). For July and August, we believe sales development has been soft, and we forecast Q3 revenue growth of 1.3% in local currencies. However, due to a 5% negative FX impact, we estimate reported revenue will decline by -3.7%, slightly below the consensus forecast.

In the lower lines, we expect the negative external factors which affected purchasing costs earlier in H1’25 (freight and FX) to turn supportive in H2’25. However, we anticipate that this will be partially offset by higher markdowns, driven by the need to stimulate customer activity. In terms of operating expenses, we believe that H&M has shown good cost control in H1’25, and we expect this trend to continue in Q3’25. Additionally, we anticipate a positive margin impact from the absence of the ~ 200 MSEK one-off cost in Q3’24 related to the closure of Afound. On the flip side, we expect some OPEX deleverage related to FX, as SEK represents a greater share of H&M’s operating costs than sales. Overall, we estimate that absolute EBIT will increase to 3,585 MSEK, with the EBIT margin improving from 5.9% to 6.3%.

We have made minor estimate revisions

We have revised our earnings estimates down by some 2-3% in the coming years. 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. As we have stated previously, we expect H&M to be negatively affected by tariffs. Ahead of any price adjustments, we expect tariffs to weigh on margins. As we have previously stated, at the current level of tariffs, we believe H&M is more likely to raise prices in the US to offset these effects, rather than relocate production. However, we believe such price increases won’t materially affect results until 2026.

Valuation looks stretched

In our view, the valuation multiples are high in absolute terms (2025e P/E: 24x and EV/EBIT: 20x), and the DCF and relative valuation paint a similar picture. H&M’s strong brand and healthy balance sheet are convincing, but there are topline concerns, and we believe that in the current uncertain operating environment, overstretched multiples are unwarranted. Hence, we believe that the risk/reward is weak and we wait for better entry opportunities.