H&M's Price Target Finds a Floor, At Least Until Next Results

STOCKHOLM, Sweden — The past six months have been a period of relative calm for the average price target for Hennes & Mauritz AB. It may not stay that way for long if the Swedish clothing retailer fails to show a turnaround this fall.

“I don’t think we’re necessarily done at current levels,” Joakim Bornold, an investment adviser at Nordnet AB, said by email. “H&M will probably miss its targets significantly also this year and will find it difficult to defend their forecasts going forward. If there is no significant turnaround during the autumn, I think we’ll see further adjustments to the share-price estimate.”

Since the end of March, the average analyst price target has fluctuated only 4 kronor, varying between about 118 kronor and 122 kronor, according to data compiled by Bloomberg. That’s in stark contrast to the swing in the 12 months through March, when it slumped by 134 kronor, or 52 percent.

That’s also evident when looking at the average week-on-week change in H&M’s price target, which was just 0.2 percent in either direction in the past five months, narrower than the 1.6 percent variation in the 12 months through March.

While the average price target has stabilised for now, that doesn’t mean H&M offers any great return potential. Based on the stock’s current level and average target, the retailer could fall 4.5 percent in the coming year. In the past five months, the return potential has averaged a negative 15 percent, compared with a positive 11 percent in the 12 months through March.

Some analysts reduced their estimates for H&M in recent days. Goldman Sachs Group Inc.’s Richard Edwards lowered his price target to 112 kronor from 120 kronor on Aug. 30, after cutting his earnings projections due to persistent disruptions to distribution and rising inventories. JPMorgan lowered its target to 105 kronor from 110 kronor on Aug. 31. Citigroup Inc. has also cut its earnings estimates.

While H&M’s sales update on Sept. 17 is likely to be supportive, third-quarter results on Sept. 27 may give “the full picture,” Citigroup analyst Adam Cochrane said in a note to clients on Aug. 30. “Until the inventory overhang is addressed, the earnings risk looks skewed to the downside,” he said.

In a preview of H&M’s sales and third-quarter results, Deutsche Bank AG analyst Charlie Muir-Sands said he expects that “H&M will have continued to be hampered by both its excess levels of older inventory, as well as disruption from the second-quarter transition of supply chain and e-commerce systems in several markets,” even as industry data point to a slightly better clothing market in the second quarter.

“We expect to see continued margin pressures, notably from markdown and operating costs, and despite the theoretical sourcing cost tailwind,” he said.

Analysts estimate H&M will report third-quarter sales of 54.5 billion kronor ($6 billion), on average, an increase of 6.5 percent year-on-year. Pretax profit is seen falling to 4.75 billion kronor from 5.02 billion kronor.

The murky outlook for H&M is reflected in stock ratings, with only 6 percent of analysts recommending clients buy the stock.

By Niklas Magnusson and Hanna Hoikkala; editors: Blaise Robinson, Tasneem Hanfi Brögger, John Viljoen and Celeste Perri.