H&M Q2'25 preview: No signs of a turnaround yet

H&M will report its Q2’25 (March-May) results on Thursday, June 26th, at 8:00 am CET. While H&M is progressing through its turnaround, we believe there will be limited visibility of this in Q2, due to modest sales growth and continued headwinds to gross margins. In our view, the valuation multiples are still on the high side, and we therefore see little upside on a 12-month horizon. As a result, we reiterate our Reduce recommendation and target price of SEK 130 per share.

We expect another challenging quarter

Whilst H&M already in connection with its Q1 report, disclosed slightly positive growth (+1%) for March, we expect that the market has continued to be soft since then. We forecast Q2 revenue growth to be 1.5% in local currencies, roughly in line with consensus. However, we expect a -5.5% negative FX impact, due to the strengthening SEK, leading to -4.5% reported revenue growth. In the lower lines, we expect the gross margin to again move lower, dragged by similar factors to Q1. Regarding operating costs, H&M reported solid cost control in the last quarter, despite increased marketing costs. For Q2’25, we expect the company to continue to show good operational cost control, together with a margin tailwind from the 199 MSEK one-off cost in Q2’24 associated with the cost-saving program. On the other hand, we expect some OPEX deleverage related to FX, as SEK represents a greater share of H&M’s operating costs than sales. In addition, higher marketing costs are expected to further pressure the EBIT margin. Overall, we therefore estimate the EBIT margin to decline from 11.9% to 9.8%.

We have revised our estimates

For Q2’25, we have lowered our revenue growth estimates in local currencies by 150 bps to 1.5%, due to somewhat more subdued markets than previously anticipated. Looking ahead to H2, with limited evidence of a market turnaround and question marks over H2 performance in the US if retailers start to pass through price increases to consumers, we remain cautious on our top-line estimates. As a result, we have lowered our revenue estimates by some 2% for 2025. On the gross margin side, we still expect that the effect of external factors, markdowns and price investments, combined with ongoing supply chain benefits, will have a positive effect in H2. However, lower revenue estimates and some fine-tuning in the cost estimates lead to 5% lower earnings expectations for the current year.

We still anticipate mid-single-digit growth over the medium term. Given our expectation of a relatively stable gross margin in the coming years, this should provide some operational leverage. As we have stated previously, we expect H&M to be negatively affected by tariffs. Given the timing of stock shipments, we expect impacts of tariffs to start during Q3. At current levels, it is possible that some of the increased costs could be passed on to consumers through price adjustments. However, depending on the magnitude of the tariffs, it could be difficult for H&M to fully offset the impact through pricing, increasing the risk of further margin pressure.

We stay on the sidelines

With our updated estimates, H&M's P/E and EV/EBIT for 2025 are 20 and 17x, respectively. These multiples are in the higher range of our accepted valuation multiples, and we view them as relatively neutral at best, given the current uncertain operating environment. More attractive valuation levels may only emerge when looking at the multiples for 2026 (P/E: 15x), although these estimates depend on uncertain improvements in earnings, which have so far disappointed. The DCF is also not sufficiently higher than the current share price, suggesting limited upside to the valuation. Overall, we therefore currently believe that the stock is fairly priced given the uncertain operating environment.