We revisit our previous H&M trade idea as it has been one of the best-performing retail stocks, posting a +33% 1YR return (-12% avg, among major apparel peers) on the back of strong margin beat at its 4Q25 results. A combination of tight cost control, supply chain efficiencies, better inventory management, and currency tailwinds led to a 130bp YoY gross margin expansion, taking spot to a 5-year high and at a technical resistance level.
However, given the stock's strong re-rating versus the sector (a c.20% premium to its apparel peers vs average 17% discount) and its full valuation at a PE of 19x (a 26% premium to its long-term 10Y average), it is likely pricing out the risks of failing to maintain sales growth of more than 2%. Structural headwinds from rising Chinese apparel competition persist, and with retail data showing a softer 1Q to date with sales -2% YoY, consensus expectation for 1.6% YoY growth at its upcoming 1Q26 results release on 26 March may prove to be optimistic. With 3M ATM IV undemanding at a 3YPc40 we choose to play the downside via limited loss structure and propose Long Jun26 160 Calls costing 2.6% of underlying. (Spot ref 182.3, Fwd ref 180.3)