Investing.com — Shares of H&M (ST:HMb) fell on Tuesday following a downgrade by RBC Capital Markets, which revised the stock’s rating to "sector perform" from "outperform."
The brokerage cited a slower-than-expected recovery pace in H&M’s sales and ongoing challenges posed by macroeconomic conditions and stiff competition.
Analysts lowered their price target for H&M to SEK 165 from SEK 185, citing concerns about sustained earnings growth.
H&M is undergoing a brand refresh and has seen early positive results, such as improved product offerings and a more engaging online shopping platform.
However, RBC analysts believe these efforts have yet to yield consistent results across all markets, necessitating further investment.
The company’s gross margin outlook remains stable, aided by falling raw material and freight costs, but this is offset by currency headwinds, particularly from the strong U.S. dollar.
The analysts also flagged operational cost pressures, with higher marketing expenses being a particular concern.
H&M's ambition to expand its midmarket presence requires substantial additional investment to enhance the shopping experience and product appeal.
RBC expects these factors to constrain operating leverage, especially as H&M continues to grapple with an increasingly competitive retail environment.
H&M has made strides in modernizing its digital offerings, with an updated website now active in markets representing over half of its global sales.
Despite these efforts, RBC analysts have trimmed their earnings forecasts for FY24 and FY25 by 7-8%, placing their expectations about 10% below the market consensus.
This revision reflects the slower-than-anticipated recovery in sales and profit margins that remain below pre-pandemic levels.
While H&M's valuation at approximately 19x projected 2025 earnings per share is considered fair, the RBC team does not see major catalysts for a major re-rating in the near term. They noted that stronger upside potential exists in other European apparel companies such as Zalando and Hugo Boss.
H&M is expected to continue expanding its presence, including a planned launch in Brazil next year. However, analysts remain cautious about the company's capacity to drive a meaningful and consistent recovery, leading to their neutral stance on the stock's performance.
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