Source: Company reports/Fung Global Retail & Technology

3Q16 RESULTS

Swedish fast-fashion retailer H&M reported SEK49.0 million in net sales in the three months ended August 31, 2016. This was below the consensus estimate of £49.5 million and up 6.4% from SEK46.0 million in the three months ended August 31, 2015. The company stated that sales did not reach the company’s targets in 3Q16 and did not provide comparable stores sales growth rates. The gross margin contracted by 190 basis points in 3Q16 to 54.0%, negatively affected by the strong US dollar on purchasing costs and increased discounting activity. The SG&A margin increased by 40 basis points year over year to 41.3% in 3Q16. The adjusted operating margin also contracted by 210 basis points from 14.9% in 3Q15 to 12.8% in 3Q16. Diluted EPS was SEK2.91 for 3Q16, down 9.3% from SEK 3.21 in 3Q15 and in line with the consensus estimate. In 3Q16, the company opened a net 58 stores, including 54 H&M stores and 3 COS stores.

9M16 RESULTS

H&M reported SEK139.6 million in net sales, in the nine months ended August 31, 2016, representing a 5.6% year-over-year increase. The gross margin for 9M16 contracted by 230 basis points year over year to 54.6%, and the operating margin declined by 320 basis points year over year to 11.8% from 15.0%. For 9M16, EPS declined by 20.8% year over year, from SEK9.29 to SEK 7.69. The company opened a net 211 stores.

GUIDANCE

H&M expects group revenues including VAT to increase by 1% year over year in local currencies in September 2016. Sales in September to date have been negatively affected by unseasonably hot weather resulting in a challenging start to 4Q16. Due to weaker sales in September, there is a risk of increased markdown activity in 4Q16, compared to 4Q15. The company targets to increase the number of global stores by 10% to 15% annually. For FY16, H&M plans a net addition of 425 stores, with most of the expansion taking place in existing markets, with China and the US representing markets with the most new store additions. The main focus of the expansion will be on the COS brand. The bulk of new store openings will happen in 4Q16, with a planned 214 new store openings taking place in the quarter. H&M opened its first store in Cyprus in September and is opening its first store in New Zealand in October. In FY17, H&M plans to open stores in four or five new markets including Colombia, Iceland and Kazakhstan. The H&M group also plans to launch one or two new brands in FY17. H&M will launch online stores in Canada and South Korea in the fourth quarter. A total of 11 new H&M online markets will be added in FY16, for a total of e-commerce businesses in 35 markets by the end of FY16. FY16 revenue consensus estimates stand at SEK193.8 million, implying annual year-over-year growth of 7.1%. Consensus expects operating profit of SEK24.8 million, implying a year-over-year operating profit decline of 8.1%. The FY16 consensus EPS estimate is SEK11.4, implying a year-over-year EPS decline of 10.8%.