We believe revenue growth has remained soft in H&M’s Q1 (Dec-Feb), and we have therefore revised down our revenue estimates slightly. However, we still believe that supply chain efficiencies, good operational cost control and external margin tailwinds should continue to support profitability. In our view, the valuation levels are still elevated, and, given the ongoing topline concerns, we still view the risk/reward as unattractive. As a result, we reiterate our Sell recommendation and target price of SEK 155 per share.

Investment case relies on increased sales growth

In our view, H&M's investment case depends on product and brand investments to strengthen the customer offering and drive a sales-driven margin recovery. While the biggest positive driver for H&M is clearly topline growth, the main near-term risks to achieving this are a lack of brand traction and prolonged weak consumer confidence.

Growth continues to lag, but we expect margin improvement to continue

H&M indicated in its Q4 report that Dec-Jan in local currencies were down -2% in local currencies, mainly due to consumers shifted spending to Black Week in November, cautious supply planning in the US, headwind from Chinese New Year timing and overall muted demand in some large European markets. However, we believe that sales has accelerated somewhat in February, mainly due to softer comparables and reverse effect of the Chinese New Year timing. Overall, we forecast local-currency revenue growth to be roughly flat for Q4. However, in our updated estimates we now expect a much more negative FX impact (-9%), driven by a stronger SEK, which result in a reported revenue decline of roughly 9%, roughly in line with consensus.  As for margins, while we expect tariff impacts to be more negative than in Q4, we still forecast a gross margin improvement to 50.0% in Q1’26 (from weak comparisons of 49.1% in Q1’25), supported by supply chain efficiencies, lower freight costs, and USD weakness. While we expect FX-related OPEX deleverage to remain a drag on margins, we believe that continued strong cost control should help drive EBIT improvement to 1,330 MSEK and lifting the EBIT margin slightly to 2.6% (from 2.2%).

We remain cautious in our short-term revenue growth assumptions

We have lowered our revenue estimates slightly for Q1’26,  due to that we expect a stronger negative FX impact. In the bigger picture, we believe H&M’s strategic initiatives around product and customer experience are well founded but have yet to translate into meaningful sales growth. As a result, we remain quite cautious in our growth assumptions in the short-term. That said, given H&M’s consistent outperformance on operating cost control over the past three quarters, we remain confident in a continued margin improvement. In the longer term, we expect the gross margin to be around 54-55%, with mid-single-digit top-line growth driving operating leverage and supporting an EBIT margin improvement from around 8% in 2025 to around 9.5% over the longer term.

We still believe that the valuation is stretched

In our view, the valuation multiples are high in absolute terms (2026e P/E: 21x and EV/EBIT: 17x), and the DCF and relative valuation paint a similar picture. H&M’s strong brand and healthy balance sheet are convincing, but there are still topline concerns. We believe the elevated valuation reflects increasing confidence in the margin turnaround. However, without sustained revenue growth, it will be difficult for the company to demonstrate durable long-term earnings growth. In the absence of clear evidence supporting such growth, we view the risk/reward as unattractive, and we continue to wait for more favorable entry points.