|Shares Out. (in M):||1,655||P/E||26.1x||25.7x|
|Market Cap (in $M):||489,405||P/FCF||37.0x||38.0x|
|Net Debt (in $M):||-13,918||EBIT||23,994||24,360|
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H&M is an intriguing short trading at all-time highs with a healthy valuation at 15-16x 2014 EBITDA, 25x P/E for a business with deteriorating returns on capital, margins, and store productivity. This is priced for perfection and any hiccup in its growth and/or margins could potentially cut the stock by 30-40%. We believe the increasing competition from other fast fashion retailers and store growth that is penetrated in the high value locations will lead to a lower topline and margin degradation over time – potentially for a double hit with operating deleverage. We think the stock is worth under 200SEK, down 33% from close to 300SEK today, based on, what we believe are generous assumptions, a 2015 EPS of 11.50SEK at a 17x P/E multiple.
H&M is a fast fashion retailer (Europe’s second largest retailer) offering collections for women, men, teenagers and children which include shoes, accessories, clothing, cosmetics , etc. The Company’s target is to increase the number of stores by 10-15% (that’s quite a feat – it means they have to open more stores every year to keep up with the growth targets in what we believe to be in locations that are not as good). H&M is controlled with 70% voting and close to 40% share ownership by the Stefan Persson family – which is clearly why the dividend is extremely important to them.
Growing new store base but we believe will be at sub-tier locations (in lower GDP countries – in many cases emerging markets) and provide for lower returns
Margin pressure as they rollout online
Dividend – potentially at risk if the operating deleveraging continues
Competition increasing with global expansion – Forever 21, Uniqlo, Zara, Asos, Topshop, Mango, Primark
Difficult comps in the back half – Consensus at 2.25% (we think there is a good chance it could be negative)
China Bull story – seems a bit suspect
With the Company trading at almost 16x FY 2014 EV/EBITDA, an almost all-time high despite increasing competition, weakening gross margin, increased technology expenditures , continued lower store productivity and declining returns on capital. Not only do we believe that the out year consensus numbers are too high, but also the multiple should reflect this lowered earnings trajectory, and arguably trade below the 10-year average forward multiple of 12.8x. Our bullish estimate is already 10% below street consensus on Ebitda for 2015 and we believe the Company is ripe for multiple compression at these levels. Our price target is under 200SEK.
|(SEK In Millions)|
|Revenue Growth Rate||1.4%||9.8%||6.4%||13.8%||11.0%|
|EPS Growth Rate||-15.3%||6.6%||1.7%||9.2%||1.5%|
|Fully Diluted Shares||1,655||1,655||1,655||1,655||1,655||1,655|
|P/E - FC Estimates||28.5x||24.8x||22.1x|
|Valuation on 2015 Below consensus Numbers|
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