The Rise And Fall Of H & M… And Rise Again (?) [Case Study] – ValueWalk Premium
H & M

The Rise And Fall Of H & M… And Rise Again (?) [Case Study]

Readers will be familiar with Hennes & Mauritz AB (also known as H & M) – the Swedish multinational clothing-retail company known for its fast-fashion clothing for men, women, teenagers and children.

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H & M

It is the second-largest global clothing retailer, just behind Spain-based Inditex (parent company of Zara).

In this episode of our Company Case Studies Section, we cover its rise and subsequent fall.

You can also get our slides here.

H & M Case Study:

It was not too long ago in 2011 where H & M opened their flagship outlet in Orchard road. Hundreds flocked to its opening which received an overwhelming response.

H & M was diligently executing its global expansion plan – opening outlets all around the world.

It was also locked in an arms race with Inditex (owner of Zara). Back then, it was not readily apparent who would emerge victorious.

Fast forward several years, the picture has changed dramatically. H & M faces intense competition on all fronts as once loyal customers abandon it in droves.

This once proud giant has seen a dramatic shift in fortunes. Its share price has fallen from its peak in 2015 of SEK 365.40 to only SEK 120.94 – a drop of more than 65%.

The reasons for its decline are multi-fold, and its explored in-depth in different articles such as:

Why fast-fashion brands like H&M are losing millennial customers in Malaysia and Singapore

We visited an H&M store and saw everything that’s wrong with the brand

Its troubles are far from behind it. Its suffers from a surge in unsold inventory resulting from lacklustre sales. This points to substantial clearances sales down the road which is sure to put further pressure on already declining margins.

Business Discussion:

Discounting short term business pressures, the bigger questions for investors is really what the long-term future of H & M is.

Is the intangibles of the brand still salvageable? Or is it doomed to suffer the fate of other retail brands which no longer exist.

Value investing both involves taking a contrarian opinion – and being right. There is no doubt that H & M shares have fallen dramatically – but are they cheap?

Financial Position:

H & M

On the financial front, the company’s once strong financial position has been hit by poor operating performance. Investors should also be aware of off-balance sheet liabilities  (i.e. lease obligations) which represent a significant part of the company’s liabilities.

Whether H & M can continue to pay its dividend (more than 7.5%+) its also another important question to ask considering its deteriorating financials.

FY 2015 FY 2016 FY 2017
Free Cash Flow 13,472.00 12,044.00 11,276.00
 Dividends Paid -16,137.00 -16,137.00 -16,137.00
Deficit -2,665.00 -4,093.00 -4,861.00
In Millions of SEK except Per Share, Source: Bloomberg

Ending Thoughts:

We hesitate to say with conviction with the fashion tastes changing dramatically. In the end, the worth of a company is ultimately the value of its future cash flows discounted to the present – and in this case we struggle to understand what the business and its cash flows would look like ten years from now.

Article by Jun Hao, The Asia Report


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