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Nov 21, 2008
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Is H&M a safe haven in retailing storm ?

By
Reuters
Published
Nov 21, 2008

STOCKHOLM, Nov 21 (Reuters) - Retail stocks have been slashed as the financial crisis has hit consumer spending and brought an end to a buying binge.

Hennes & Mauritz , the world's third-largest clothing firm by sales, is often cited as a firm that should manage well in a downturn, thanks to its geographic spread and low-price position.

But is the Swedish stock worth buying in the current climate?

GAINS SEEN

H&M stock has lost more than a third of its value this year, but it has fared better than the DJ Stoxx European retail index .SXRP, which is so far down 45 percent.

H&M is now at attractive levels both historically and relative to the Swedish market, said Evli Bank's Anders Wiklund.

"The premium that they have been traded at has been pushed lower quite significantly," the analyst said.

Jyske Bank analyst Christian Nagstrup, who has a "buy" on the shares, said H&M had done well during past downturns and was still going strong despite the wider gloom.

"It seems like this downturn is more severe than what we have experienced in the past years. But they show pretty good momentum despite a very difficult environment," Nagstrup said.

The latest evidence of H&M's resilience: October total sales were up 9 percent year-on-year and like-for-like sales down 2 percent. In contrast, October apparel sales in Germany, which is H&M's biggest market, fell 5 percent from a year earlier.

"I think they are impacted, but not to the same extent as their competitors. What we have seen indicates that they are taking market shares. And I think they will do better than the average," said Nagstrup.

Anders Wiklund highlights H&M's strong financial position and growth opportunities as positive factors.

"H&M has a strong financial position, which is even more important these days. There is also room for further growth, as there are many markets where they are not yet present," he said.

Wiklund recommended buying on a two-to-three-year horizon, though he advised more caution on a one-year view.

STEER CLEAR

Fred Bjelland at Morgan Stanley, one of few analysts with an underweight rating on H&M, believes the market underestimates the risk to margins from a stronger dollar.

"Its industry-leading EBIT margin is unsustainable," Bjelland wrote in a research note published on Nov. 6. He said his position had not changed after H&M's October sales figures were released earlier this week.

H&M has benefited from a weaker dollar in recent years as the retailer does much of its sourcing in dollars and has limited sales in the currency. Bjelland thinks past currency imbalances have allowed H&M to expand its margins beyond industry norms.

But as the dollar strengthens, H&M will face tougher times.

"Coupled with increased markdown risk (due to lower sales growth), we believe that H&M's gross margin will continue to fall, which will put significant pressure on its long-term earnings prospects," Bjelland wrote.

Bjelland thinks the share price already discounts higher risk, but does not yet factor in lower long-term earnings potential, which rival Inditex does.

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