Source: Company reports/Fung Global Retail & Technology

1H17 Results

Swedish fast-fashion retailer H&M reported SEK 98.4 billion in net sales in 1H17, slightly below the consensus estimate of SEK 98.8 billion and up 8.6% year over year. Constant-currency sales increased by 5.0% in the half and UK sales increased by 6.0%. The company did not provide comparable store sales growth rates, but rapid new store growth implies ongoing negative comparable store sales. The company’s gross margin contracted by 20 basis points year over year, to 54.7%, and the SG&A margin increased by 10 basis points, to 43.7%. The adjusted operating margin contracted by 30 basis points year over year, to 11.0%. Diluted EPS was SEK 5.05 for 1H17, up 5.9% year over year and above the consensus estimate of SEK 4.84. In 1H17, the company opened a net 147 stores, including 125 H&M stores, 15 COS stores and 10 & Other Stories stores. In 2Q17, H&M opened its first store in Kazakhstan and its first store in Colombia. The company also launched online sales in six new markets: Turkey, Taiwan, Hong Kong, Macau, Singapore and Malaysia. Inventory levels were up 27% year over year at the end of 1H17, which the company attributed to continued expansion, higher inventory levels going into the second quarter and a lower-than-planned sales increase.

Outlook

H&M expects June 2017 group monthly sales including VAT to increase by 7% year over year in constant currencies. The company is targeting a 10%–15% increase in group sales in constant currencies in FY17. Management estimates that online sales will grow by at least 25%–30% annually going forward and said that online sales already account for 25%–30% of total sales in some markets. H&M’s target is to increase global stores by 10%–15% annually. For FY17, the company plans to open 400 net new stores, which would represent the lower end of its target range. By the end of FY17, H&M will enter four more new markets, including Iceland, Vietnam and Georgia. The company will open online stores in Cyprus and the Philippines in 2H17. H&M will launch a new brand called Arket with five stores and an online offering in 18 European markets in early autumn 2017. The company plans to open the first stand-alone H&M Home stores in 2018. The company also plans to launch H&M online in India and to open new H&M stores in Uruguay and Ukraine in 2018. The consensus estimate for FY17 revenue stands at SEK 210.0 billion, implying year-over-year growth of 9.2%. Consensus expects H&M’s operating profit to be SEK 25.0 billion, implying an operating profit margin of 11.9%. The FY17 EPS consensus estimate is SEK 11.74, implying a year-over-year EPS increase of 4.2%.