2. Company Overview
• Swedish company trading on Stockholm Stock Exchange
• 2nd largest global clothing retailer in the world, behind Inditex
• Fast fashion “with affordability” at/ avg price of $21.40
• Well-established brand name all across E. and W. Europe
• Rapidly expanding across developing markets in Asia
3. Geographic Breakdown
Europe
• Steady growth despite severe recession
• 2,548 stores, w/majority in W. Europe
• 177 new stores planned for 2015
• $13.7B of business last year
• $5.4M sales/store beating other
European retailers
Franchise Stores
• Growing aspect of H&M’s
business
• 150 current stores, w/~20 being
added every year
The Americas
• Vast, largely untapped growth potential
• Successful launch of online market
caused margins to explode in 2014
• 435 Stores, w/65 new stores planned
• $5.5M sales/store almost double that
of anemic American retailers
Asia
• Biggest growth market, almost
entirely untapped
• 398 stores, w/whopping 120 new
stores planned for next year
• $5.1M in sales/stores has been
falling due to competition and
smaller stores
4. Role in the American Industry
• Different business model than other popular
apparel brands
• Customer base is low-middle income young
people who will shop for the latest trends several
times a year (compared to Zara which targets
more wallet-heavy consumers)
• High inventory turnover rates at ~12 compared
to industry avg. of 4 - 5
• As Gap, JCPenney, Aeropostale, and
Abercrombie close stores across the US, foreign
retailers like H&M replacing them in prime mall
locations
5. The Real Competition
• Inditex – Largest sized in industry
w/ $20B of annual sales. Parent
brand to Zara. 66% sales in
Europe, 20% in Asia, 14% in US.
15% overall store growth in 2014.
• Fast Retailing – Rapidly growing
in the Western World. 75% sales in
Asia, w/minimal penetration in
Europe and the US as of now.
12% store growth in 2014.
• Forever 21 –Privately held retailer
w/$3.7B in sales in 2013.
6. Performance
• Last year was huge for H&M w/13% increase in net margins
along w/sales growth, esp. in recession-hit Europe
• $730K margins/store, as compared to only $230K for Fast
Retailing and $590K for Inditex
2014 Sales Sales
Growth
Store # Store
Growth
Sales/
Store
P/E
H&M $18.2B 17.8% 3511 12.1% $5.2M 26.2
Inditex $20.1B 8.3% 6340 15.1% $2.9M 37
Fast
Retailing
$11.6B 20% 2753 12.4% $4.2M 44.3
7. Concerns Deflating P/E
1) Poor macroeconomic conditions in Europe
• A large portion of H&M’s transactions are made in euros
• Downturn took harder toll on H&M than Zara
2) Hyper-competitive market in Asia
• All Western retailers are headed over to woo Chinese customers
• Fast Retailing already has massive presence
3) Lateness to the online marketplace in growth countries
• Zara and Uniqlo got there first – H&M just launched
4) One-dimensionality of customer type
• Affordability of brand is biggest competitive advantage but also a
constraint as customers looking for more class may go somewhere else
5) Rising manufacturing costs
• Wages in Bangladesh and China are rising
8. Variant Perception
1) European recession won’t last forever
• W. European economies have been recovering over past year
• Sales/store earnings for Europe rose for first time in 5 years
2) New market penetration holds significant upside
• H&M has just started gaining traction with American consumers
• Asian customers have responded well to the brand despite options
3) Management is dedicated to growth and versatility
• Opened online marketplaces in China and US in 2013
• Launched Conscious Collection which is both more up-class and
also manufactured with environmental awareness
9. Using the PEG Multiple
• H&M, Fast Retailing, and Inditex all growth stocks
• Case to be made that H&M is also a value stock
• Market obviously overexcited about Uniqlo and Zara
• Fair PEG is considered close to 1, though stocks in the
apparel market tend to trade at higher PEGs
• H&M is undervalued by this metric. P/E should be ~28
Company P/E Expected
EPS Growth
PEG
H&M 26.2 28% 0.9
Inditex 37 12% 3.1
Fast Retailing 44.3 26% 1.7
10. Investment Thesis
• Shares of H&M are trading at a moderate discount if financials and
growth strategies of competitors are accounted for:
• H&M should trade at a multiple closer to 28, bringing it more in line
with competitors, due to 3 main reasons:
1) Increasing diversity in price point, medium of sales, and fashion lines
2) Strong growth in untapped markets in Asia
3) Decay of traditionally popular brands in the US
Company H&M Inditex Fast Retailing
PEG 0.9 3.1 1.7
