H&M shares dropped 12% following its 4Q23 results announcement on 31 January 2024 on the back of a 7% EPS miss, and weaker December/January sales data (-4% YoY), reflecting weakness during the Christmas shopping period, contrary to rivals such as Zara and the online fast fashion titan Shein, both of which reported stronger sales growth. In response to ongoing challenges, H&M has shifted its focus towards improving profitability rather than prioritising sales volumes, targeting a 10% operating margin in 2024. This strategy involves reducing costs by closing stores, despite the company's 4Q23 operating profit margin declining to 7.2% from 7.8% in 3Q24. Analysts are broadly pessimistic on H&Ms 10% target in 2024. Nevertheless, the stock price has recovered half of its decline due to peers’ pointing to stronger sales data for the start of the year.
In an effort to adapt and strengthen its market position, other than appointing a new CEO, H&M has committed to investing more in the company's responsiveness to changing fashion trends, which has been one of the reasons for the company losing market share. This includes plans to move some manufacturing closer to its key markets from Asia, enhancing the brand’s ability to adapt quickly to consumer demands, while sales at its more upmarket brands like Cos, Arket and Weekday continue to be strong, helping profitability. Despite competitive pressures, positive trading updates from peers point to resilience in the European retail sector for the Spring season, particularly in key markets like Germany and across Europe. Retailers such as Zalando, Inditex, Tod's, and Adidas have all noted positive starts to the season and a potentially stronger sales outlook at H&M’s 1Q24 results on 27 March could alleviate the negativity that has weighed down on the stock following 4Q23 results. H&M trades at a historically deep discount of 29% to its main competitor, Inditex while analysts expect stronger earnings growth.
With the stock trading at an 16% discount to its long-term P/E (12% discount to STOXX) and 3M ATM IV at 2YPc26, we suggest buying June 24 175 calls financed by June 24 130 puts at a cost of 0.33% of underlying (spot ref: 152). Should the spot price rise 10% to 170 the strategy would return c.3.5x on the premium employed, all else equal. Alternatively, you are left holding the stock at a 29% discount to its long-term P/E.