Scandi high-street fashion cornerstone H&M has played second fiddle to rival Zara’s parent company Inditex in 2024, but could the tide be turning in the fourth quarter?
H&M’s third quarter was a particularly tough one, with City analysts expressing concern over the Stockholm-listed chain’s weak top-line growth and squeezed profit margins.
Shares have reacted accordingly, with H&M’s valuation sliding more than 12% year to date.
Spanish Zara owner Inditex, meanwhile, is currently up more than 35% thanks to a raft of bullish earnings statements.
Zara’s (and Inditex’s other brands including Pull & Bear’s and Massimo Dutti’s) spring/summer ranges were particularly well received, resulting in a solid first-half result in September.
But in a sign of cautious optimism, analysts at Barclays PLC (LSE:BARC) said H&M is expected to show “decent, albeit not spectacular” revenue growth in the fourth quarter.
The bank forecasts a 4.5% rise in sales in local currencies, with overall revenue increasing by 0.8% in real terms when accounting for currency headwinds.
Barclays attributes the softer performance to "less helpful" weather conditions in October and November, combined with heightened promotional activity.
The Swedish apparel giant is expected to post a 4% earnings before interest and tax (EBIT) decline and tighter gross margins due to rising freight costs and markdowns, alongside increased marketing investments.
Despite near-term challenges, Barclays maintained its ‘overweight’ rating on the stock and reaffirmed its price target of SEK 185, which suggests a 20.5% upside from the last closing price of SEK 153.55.
The bank sees potential for improved performance in the next fiscal year, supported by the company’s promotional activities during Black Friday and the strategic focus on product quality and cost optimisation.
H&M shares are currently trading on a 15.9 times price-to-earnings (PE) ratio, which is historically low compared to its 21.5 times five-year average.
It certainly puts H&M on the cheap side, but it will take a decent quarterly result to justify any upside potential.
Investors will need to wait until 30 January 2025, when H&M next reports, to get a clearer picture on the matter.