Wednesday 15 May 2013

Analysis of HM

A Swedish fashion retail company

Company: H&M

Business: Fashion retail with H&M, & Other Stories, Cheap Monday, COS, Monki and Weekday. Some of these I have already mentioned when looking into attractive stores/shops. Only in eight countries in Europe is the online shop up and running but this they are working on expanding.

Active: They have 2800 stores in 49 markets which means they are half the size of Inditex. The benefit with that means that there is definitely more room for H&M to grow. The main markets are in Europe where they are well established but also in North America. They have few stores in South America, Asia, Middle East and Africa.

P/E: 23.0

The running P/E for H&M is fairly high with 23 but it is still slightly lower than Inditex. The price to book is also high which indicates that retail seems to be higher than many other industries which then of course leads to that Graham would never have bought this stock since the margin of safety is just not present. The earnings per sale is ok with 14% and with an increased online shop it might be possible to improve this. Or is the cloth return rate on the online shops just too high? The book to debt is very good and they can survive some harder days. The growth for the last five years has been 6.5% which I find to be too low (Inditex has almost 9%) due to two reasons... they are expanding with almost 10% of new stores each year meaning that 6.5%-2% (inflation) equalises that those 10% expansion only generates 4.5% yearly growth plus they seem to loose ground to Inditex especially since they used to have very good margins on their sales but today that is even 1% unit less than Inditex. According to Lynch and Graham a motivated P/E would be around 20 which means that the H&M today is ok valued by the market maybe even slightly too high. They pay a good dividend of over 4% however that represents 93% of the earnings which is not sustainable at all in the long run so either their sales plus margins must increase or they will soon be forced to decrease the dividends.

Conclusion: H&M is a good growth company. Their margins are currently squeezed and we should not forget that the cotton price last spring/summer was crazy high due to India which of course had a significant impact on H&M. Today I would not buy the company because I find it too expensive. If the P/E drops down a bit below 20 then that would be reason to step into H&M because they still have many markets to step into with their great concept and well visited stores.

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