H&M Headed for Improved Fourth Quarter, Credit Suisse Says

The analysts lower their target for the shares but predict a sales upturn in the final months of the retailer's fiscal year.
By Lisa Botter ,

Fast-fashion retailer H&M (HNNMY) could see a turn of fortunes in the fourth quarter, according to analysts at Credit Suisse, even though the investment bank is cutting its  target price again.

The Swedish clothing retailer has had a tough couple of quarters. Its second-quarter pretax profit fell to 7 billion Swedish kronor ($846 million) from SKr8.45 billion in the same period last year, earnings released in late June showed. Operating margins fell to 14.8% from 18.2%. The drop was blamed on higher purchasing costs due to the strengthening U.S. dollar and increased markdowns.

There are also increased concerns that the U.K. and possibly the eurozone could be plunged into a recession as a result of the U.K.'s decision to leave the European Union. In a special survey run after the referendum, GfK found that consumer confidence in the U.K. had fallen by eight points to a 21-year low.

The worst hit sectors are expected to be fashion and lifestyle, travel and home.

Credit Suisse is anticipating that sales at H&M should rebound in the fourth quarter of this year. It has kept its neutral weighting  on the stock but cut the target price to Skr267 from Skr275. H&M's shares were recently trading at Skr257.10 in Stockholm.

The analysts have also issued a new "blue sky" scenario with a Skr328 valuation, which could mean a big upside if the business turns.

Credit Suisse's note said that the issues H&M has faced over the past couple of seasons have been widespread across the industry due to adverse weather in Europe and North America, and poor collections. They predict sales in the third quarter will be poor due to high levels of clearance items. The analysts are forecasting gross margins of 54.2% and earnings of Skr6.6 million, which are 3.3% down on the previous year.

"We are more optimistic about subsequent quarters given that H&M's cost mitigation is improving, its entry prices have increased, it will be among the first beneficiaries if Chinese renminbi weakness and European apparel will have to see either price increases or increasing reductions in capacity over the year ahead," the note stated.

In the fourth quarter, Credit Suisse is predicting margins of 58.7% compared with a consensus of 58.3% with earnings of Skr8.5 billion versus a consensus of Skr8.3 billion.

Credit Suisse said that while the retailer is having problems throughout the world, the problems are only significant in China and Hong Kong. "We do not believe that H&M has succeeded in positioning the brand in the region in the same way that it has in North America," the note said, adding sale densities in China and Hong Kong look low.

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