Addressing the pushback
■ Following the surprising 4Q results last week, and the optimistic tone taken by management as it enters the "Exciting development phase" of multi-channel growth, we remain cautious on both near-term execution and H&M's long-term prospects.
■ While S/S comps are very soft, H&M first needs to clear record levels of Y/E inventory (128 days) through what is the smallest quarter of the year. In our view a clean inventory position at 1Q (105 days) would require a 14% Q/Q inventory reduction. Our forecast of markdown reduction in 2Q may prove optimistic.
■ Collect at store (finally being trialled in the UK) is not a magic bullet for many retailers, particularly at H&M's price points, given high levels of cannibalisation and incremental cost of picking and transport. To be accretive we believe that H&M needs in-store picking, but the RFID required will not be rolled out before at least 2018, and probably beyond.
■ Branding and Merchandising seem increasingly disconnected: Communication seems to focus on endless clearance and low price points, and there seems to be very little that is aspirational about the brand, at a time when it seems to be squeezed between Primark and Zara in key markets.
■ The current CS HOLT® default gives a warranted price of SKr279, however as an eCap stock this implies a 10 year fade in asset growth and little decline in CFROI®. Fundamentally we disagree with management's strategy of targeting double digit sales and space growth, given that store numbers have grown 76% in the past 5 years. Without slowing store growth to stabilise the platform, reduce cannibalisation and de-emphasise weaker markets, margins and returns will remain under pressure. On 19x PER the shares do not reflect our forecast of 5Y EPS growth of 8.4%.