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Free AccessH&M (HMBSS; NR, BBB) 2Q24 (3m ending May)
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.
We'd note screen cheap views above are on a sub-sector (Apparel) that has already been given width vs. other consumer curves. It may not be as positive on headline growth as travel or as staple as brewers but trading in-line with the former (see easyJet 31s vs. H&M) & giving +30 on latter leaves us viewing that weakness as well priced. Trading in-line to wider vs. equal rated & in secular decline Tobacco (see vs. BAT on 4Y) affirms that view.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.