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H&M (HMBSS; NR, BBB) 2Q24 (3m ending May)

CONSUMER CYCLICALS
Credit BulletsBulletHomepagemarkets-real-timeCredit

RBC equity analyst on headlines this morning with some optimistic takes on H&M (NR/BBB). 2Q earnings come late next month with consensus looking for LSD same-store growth. That would make it a exception among IG Apparel retailers; Kering (NR/A-) facing major brand issues on Gucci, VFC (Baa3/BBB- D.NEG) similar on Vans, PVH (Baa3/BBB- D.POS) facing HSD fall in 1Q on front loaded weakness (some self-inflicted) & Tapestry (Baa2/BBB D.NEG) with M&A/call uncertainty. Couple of asides below.

  • H&M's had had mixed analyst takes post a firm 1Q earnings (equities +15% & holding on) including some flagging competitive pricing circling the fast fashion segment (which it is majority exposed to still). Q1 did see higher markdowns/discounting & guidance is for that to continue in 2Q. We'd caveat that with co's guidance to hit 10% EBIT margin this year (helped by cost savings targeted at SEK 2b/yr). That would be 380bp bump on FY23's 6.2%, consensus sees it missing at 8.5%.
  • For credit H&M runs leverage (incl. lease liabilities now in reported figure) at 1.4x, the midpoint of a targeted 1-2x with ample liquidity. BS has been managed in BBB ratings since '21 (when inaugural 29s were issued) & in the face of sizeable equity returns from FCF - i.e. strong lever there for it to manage BS on headline weakness. Adding to credit strengths is its comparative diversification - its largest segment is Germany at only 15% - though vs. comp's it is net Euro heavy on lower Asia & NA exposure.
  • On valuation - it was our sector cheapest screen till PVH new 29s came wide. Not often we see a 30bp NIC on 5Y IG name with positive outlook & already wide secondary (did tighten 45bps from IPT). That rotation has netted only ~20bps in spread (PVH -12 in while H&M +8) & comes on higher carry with PVH sill screen cheap.
  • PVH guidance seems somewhat self-inflicted & front-loaded for this year but still we are cautious for those eyeing entry here given earnings 2 weeks away. It hasn't stopped shorter 27s reversing back in 30bps from recent wides - makes roll-down/flatteners on 29s look even more attractive (45bps for 1.6y, both only 3m par call).
  • On supply this year; PVH completed refi needs on the 31s & H&M has none but with headroom on leverage we wouldn't rule it out completely.

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RBC equity analyst on headlines this morning with some optimistic takes on H&M (NR/BBB). 2Q earnings come late next month with consensus looking for LSD same-store growth. That would make it a exception among IG Apparel retailers; Kering (NR/A-) facing major brand issues on Gucci, VFC (Baa3/BBB- D.NEG) similar on Vans, PVH (Baa3/BBB- D.POS) facing HSD fall in 1Q on front loaded weakness (some self-inflicted) & Tapestry (Baa2/BBB D.NEG) with M&A/call uncertainty. Couple of asides below.

  • H&M's had had mixed analyst takes post a firm 1Q earnings (equities +15% & holding on) including some flagging competitive pricing circling the fast fashion segment (which it is majority exposed to still). Q1 did see higher markdowns/discounting & guidance is for that to continue in 2Q. We'd caveat that with co's guidance to hit 10% EBIT margin this year (helped by cost savings targeted at SEK 2b/yr). That would be 380bp bump on FY23's 6.2%, consensus sees it missing at 8.5%.
  • For credit H&M runs leverage (incl. lease liabilities now in reported figure) at 1.4x, the midpoint of a targeted 1-2x with ample liquidity. BS has been managed in BBB ratings since '21 (when inaugural 29s were issued) & in the face of sizeable equity returns from FCF - i.e. strong lever there for it to manage BS on headline weakness. Adding to credit strengths is its comparative diversification - its largest segment is Germany at only 15% - though vs. comp's it is net Euro heavy on lower Asia & NA exposure.
  • On valuation - it was our sector cheapest screen till PVH new 29s came wide. Not often we see a 30bp NIC on 5Y IG name with positive outlook & already wide secondary (did tighten 45bps from IPT). That rotation has netted only ~20bps in spread (PVH -12 in while H&M +8) & comes on higher carry with PVH sill screen cheap.
  • PVH guidance seems somewhat self-inflicted & front-loaded for this year but still we are cautious for those eyeing entry here given earnings 2 weeks away. It hasn't stopped shorter 27s reversing back in 30bps from recent wides - makes roll-down/flatteners on 29s look even more attractive (45bps for 1.6y, both only 3m par call).
  • On supply this year; PVH completed refi needs on the 31s & H&M has none but with headroom on leverage we wouldn't rule it out completely.

Keep reading...Show less