H&M stock lowered to Neutral at UBS amid slower-than-expected turnaround

Investing.com -- UBS lowered its H&M (ST:HMb) stock rating to Neutral from Buy, citing weaker than expected sales and margins that could signal a longer-than-expected turnaround for the retailer.

The revision comes after UBS analysts observed volatility in the company’s earnings before interest and taxes (EBIT) margin and a general shortfall in sales performance.

“Our positive view on HMB was predicated on a successful turnaround in the H&M brand driving a sales and EBIT margin recovery,” UBS analysts led by Sreedhar Mahamkali said in a note.

“But continued volatility and generally weaker than expected sales and the volatility in EBIT margin suggest a potentially much longer period for this turnaround to materialise than we anticipated,” they added.

The downgrade reflects concerns over H&M’s ability to execute a successful recovery strategy, which initially seemed promising due to improvements in assortment design, pricing, sourcing, and marketing efforts.

The discontinuation of smaller non-core brands like Afound and Monki had also appeared to support a positive trajectory for the brand. However, the need for tactical promotions to boost sales has impacted gross margins, and external challenges have intensified.

In turn, UBS has adjusted its model for H&M, reducing the forecasted normalized gross margin for fiscal year 2027 from approximately 54% to 53%, and the EBIT margin from 10% to 8.3%. The price target for H&M shares has been lowered to SEK 149 from SEK 187.

Moreover, the investment bank has lowered its earnings per share (EPS) estimates by 12% and 19% for fiscal years 2025 and 2026, respectively.

The first quarter, which ended on March 27, typically accounts for only about 9% of H&M’s annual EBIT. While the quarter is not a significant contributor to full-year figures, analysts argue that it is still indicative of broader trends.

They expect a local currency sales growth of 3.0% for the quarter, with a slowdown observed in February. The shift in Black Friday timing had previously inflated sales figures reported up to January 28.

With a minor boost from favorable foreign exchange (FX) rates, analysts forecast a reported sales growth of 4.5%. They also estimate a gross margin of 49.5%, a year-over-year decrease of 200 basis points, citing “tactical promotions, lower margin mix, continued price cuts and greater negative external factors.”

Operating expenses in the first quarter are projected to be higher compared to the fourth quarter due to increased marketing expenditures, with an anticipated EBIT of SEK 1.76 billion.

“Further, with gross margin support more 2H weighted and with marketing costs annualising in 2H, we see progress in FY25e being more 2H weighted,” analysts added.