H&M – a brief comment


So far I have only blogged in Swedish. Some of my posts, however, might be of interest to a broader audience. Here I´ll give you a brief comment on H&M.

The brand name shows up almost everywhere – and it´s known to everybody. Not only a Swedish but a global success story, the Company has grown from its first shop in the town of Västerås in 1947 to one of the world´s leading fashion companies with 2500 stores in 44 different countries – i.e. in 65 years!

And the growth continues per mobile aiterna. Whole continents, like Latin America and Australia, are still waiting to be captured, while the penetration in North America and Asia just has begun. And not to be omitted, the population of the world is growing.

The business concept is to offer the most favorable combination of fashion and price – simply to give the buyers most value for their money. And this has been performed year after year due to a combination of clever designers, low production costs and superb logistics. I believe H&M is realizing larger economies of scale than any other retail company.

Financially the Company has grown so strong that it doesn´t need to borrow any money at all – its net cash position exceeds 20 billion SEK at any time. The rapid growth thus can be financed by internal means, and the shareholders be rewarded with constantly raising dividends.

Compared to many other listed companies, H&M has no need to keep large amounts of money in current assets – as the customers pay cash. And capital consuming R&D-activities are not part of the game in this type of companies. In consequence almost all of the earnings per share can be transferred to the shareholders as dividends.

But there must be threats?

Prices of raw materials, primarily cotton, have a substantial impact on margins, which has been felt the last years – in 2011 H&M earnings fell for the first time in many years. But the reason for this was that the Company refrained from price adjustments in order to boost its market shares – management calls it to invest in their customer offer. In the long run higher input prices will of course hit everybody in the fashion trade, but as clothing belong to the necessities of life H&M can be presumed to perform.

The Company founded by the entrepreneur Erling Persson a slight man age ago is by far the most valuable company on the Stockholm Stock Exchange. With a market value close to 400 billion SEK it surpasses by a lot more than 100 billion SEK number two, which is Nordea.

Is the H&M stock a clear buy?

The firm where I´m working has concluded that, given that dividends will grow like sales (which is a reasonable assumption), and furthermore that the number of stores grow by 13 per cent per year in another 7 – 8 years of time – the present stock price (230 SEK) can be justified.

To me this seems to be an utterly cautious expectation.