In our view, H&M’s Q3 report once again confirmed that the overall investment story remains unchanged with weak top-line growth but improved profitability through solid cost control and a one-off tariff benefit. We continue to stress the importance of reigniting revenue growth to achieve long-term sustainable earnings growth, particularly as margin tailwinds are starting to fade. Given the persistent growth concerns, which were at least not eased by the rather modest September guidance of 1% growth in local currencies, we continue to consider the valuation of H&M to be elevated. Against this background, we continue to view the risk/reward as unattractive and reiterate our Sell recommendation and target price of SEK 150 per share.

One-off tariff benefit drove profit beat

We view the Q3 sales outcome of 1% local currency growth as modest. While a reduction in store count weighed slightly on revenue, the fundamental challenge remains the brand's lack of strong momentum. In our view, the strategic initiatives aimed at elevating the customer experience have yet to translate into the sales growth needed to close the gap to industry peers and we see limited scope for a meaningful acceleration in the near term. On profitability, gross margin rose from 52.9% in Q3'25 to 54.0% in Q3'26, above both our and consensus forecasts, driven by a one-time tariff benefit of about 1.6 percentage points that was not included in our or consensus modeling. Adjusted for this, the gross margin came in below both our and consensus forecasts, reflecting fading supply-chain efficiencies and freight cost pressure. In our view, H&M again showed solid cost control in Q3, with SG&A down roughly 1% in local currencies. Management now guides to low-single-digit OPEX growth for the full year, and with SG&A roughly flat through Q3, we expect some upward pressure in Q4. On a reported basis, Q3 EBIT of 6,037 MSEK beat both our and consensus forecasts, though mainly due to the one-time tariff refund.

A slow sales recovery

Overall, we have kept our Q4 revenue estimates largely unchanged and expect local currency growth of around 1.5% for the full quarter. On gross margin, the company noted in its Q3 report that it expects external factors to have a somewhat negative impact in Q4 versus the same period last year, driven by higher freight costs. In addition, markdowns are expected to be somewhat higher year-on-year in the fourth quarter, primarily reflecting anticipated high promotional activity in November and the calendar effect of Cyber Monday falling into Q4 this year. Taking this into account, along with continued fading supply-chain efficiencies, we have lowered our Q4 gross margin assumption and now expect the gross margin to decline from 55.9% in Q4'25 to 55.4% in Q4'26. On OPEX, as previously noted, we expect some upward pressure from the phasing of technology investments, resulting in EBIT of 6,080 MSEK for Q4. In the medium-to-long term, we have kept our revenue estimates largely unchanged, still expecting annual revenue growth of around 3-5% and gross margins within the targeted 54-55% range. However, we have raised our medium-term operating expense estimates, reflecting the ERP rollout, which will continue to pressure SG&A in 2027 and into 2028.

We still believe that the valuation is stretched

In our view, the valuation multiples are still on the high side in absolute terms (2026e P/E: 20 and EV/EBIT: 16x), and our DCF model and relative valuation paint a similar picture. The 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.