H&M’s Q3 earnings exceeded both our and consensus expectations, and it’s clear the company is taking steps in the right direction. While the improvement in profitability was strong this quarter, sales growth remains modest, something we view as critical for a more sustainable margin recovery. As such, we would prefer to see a consistent trend of improvement before concluding that a lasting margin rebound is underway. Additionally, we believe the valuation has reached elevated levels. Given ongoing concerns about topline growth and uncertainty around the durability of the profitability gains, we still view the risk/reward as unattractive. As a result, we reiterate our Sell recommendation but increase our target price to SEK 140 per share (was SEK 130), mainly due to increased estimates.

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 topline growth, the main near-term risks to achieving this are a lack of brand traction, direct negative impact from tariffs and weak consumer confidence.

Q3 showed strong margin improvement

H&M’s Q2 revenue grew by 2 % in local currencies, broadly in line with our expectations. While H&M continues to lack strong sales growth, the profitability performance was without a doubt the positive highlight of the report. H&M's Q3’25 gross margin rose to 52.9%, up from 51.1% last year, driven by a combination of internal factors, such as ongoing supply chain efficiencies, and external tailwinds, including freight and FX. In terms of operating expenses, H&M continued to demonstrate solid cost control in Q3. The company reported absolute EBIT of 4,914 MSEK, with the EBIT margin improving from 5.9% in the prior year to 8.6%. We view this as a strong operational result, albeit against relatively soft comparables.

In our view, the key question going forward is the sustainability of these margin gains. While ongoing efficiencies in store operations and logistics are likely to persist and support profitability, we believe that further improvements in sales growth will be essential to deliver sustainable, long-term margin expansion.

Earnings estimates raised after strong Q3, but uncertainty remains

H&M indicated that it expects September sales in local currencies to be flat year-on-year, which we view as relatively neutral given the tough comparison period last year (+11%). We continue to expect relatively modest sales growth in Q4’25 (2% LCY growth), with stronger momentum likely delayed until 2026, supported by easier comparables and potentially improved consumer sentiment. On the gross margin side, external cost factors such as currency, freight, and raw materials are expected to remain supportive in Q4, although tariff-related headwinds will likely offset some of this benefit. Following the stronger-than-expected Q3 profitability, we have raised our FY2025 earnings estimate by approximately 9%. For 2026-2027e, we have made slight upward revisions and continue to forecast a gradual margin improvement, with mid-single-digit revenue growth and improved operational efficiency supporting EBIT margin expansion from 7.4% in 2024 to ~9% in 2027.

Valuation looks stretched

In our view, the valuation multiples are high in absolute terms (2025e P/E: 24x and EV/EBIT: 19x), and the DCF and relative valuation paint a similar picture. While H&M’s strong brand and healthy balance sheet are convincing, 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.