H&M Hennes & Mauritz AB (HNNMY) stock was under pressure Tuesday after Barclays analysts downgraded the fast-fashion retailer, saying rival and Zara-owner Inditex (IDEXY) was a better retail bet in Europe's challenging market.
H&M shares were down 1.58% in Stockholm, changing hands at Skr193.3 and extending a 6.58% loss in the past three months.
Barclays in a Tuesday morning note downgraded the Swedish retailer to "underweight," after it concluded the "market is unwarranted in pricing similar cash flow growth for both H&M and Inditex."
Analysts led by Boris Vilidnitsky said that H&M's sales and store analysis points to a bleak outlook for the retailer, as much of its growth has come through opening new stores and sales have contracted across all key regions.
"We conclude that the market is pricing in similar future growth for both companies," Barclays wrote. "Given our analysis of store profitability and historical overview of margin evolution, we believe that the market is over-pricing H&M's free cash flow growth, while undervaluing that of Inditex."
H&M in September said sales for the three months ending in August, its fiscal third quarter, rose 5% to Skr51.3 billion ($6.26 billion), largely in-line with the FactSet estimate. Gross profits, however, slipped to Skr26.35 billion, while the group's profit margin fell 2.6 percentage points to 51.4%, owing to, at least in part, "aggressive summers sales", the company said.
Inditex would need to grow its free cash flow at a 3.8% compound annual growth rate to meet expectations, the analysts said, but over the last 10 years Inditex has been able to grow its free cash flow at a 17.8% CAGR. "We believe that, given Inditex's superior business model, the growth rate that the market is assuming is too conservative," Barclays wrote.
They also added that H&M's margins may continue dropping further, while Inditex's margins could be defendable.
Inditex shares were marked 0.69% lower in Spain, changing hands at €29.29, extending a three month loss of 12.83%.
Inditex in Spain reported operating earnings for the six months ending in July came in at €2.29 billion ($2.75 billion), just shy of the FactSet consensus of €2.34 billion but up 9% from the same period last year. Like-for-like sales, the group said, grew 6% while net sales were 11% higher at €11.7 billion.
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