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  • H&M – Quick analysis of Q2 report

    Posted on June 25th, 2009 Peter Tjernström No comments

    H&M’s Q2 report came in better than we expected and slightly better than the analyst consensus. Sales were in line with consensus, but the gross margin was 0,9 percentage points better than expected, which contributed to an EPS 2,5% higher than expected.

    H&M has once again proven that it can deliver good results in a difficult market environment. I must admit having taken a too negative view of the company’s possibilities to deliver on this level given the tough market. I am updating my estimates for the coming two quarters based on the report and the information given today (see table below). The DCF analysis now yields a FV of 376 SEK, which is exactly at the level where H&M is traded at the moment. One of the most important investment rules is to swallow your pride when you’re wrong and limit the loss. Hence, I closed the short position at 376 SEK this morning and thus took a 3,6% loss.


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  • H&M – Analysis prior to Q2 report

    Posted on June 23rd, 2009 Peter Tjernström No comments

    This analysis will be one of a slightly different character. To begin with it is, in response to popular demand, written in English. The target of this analysis is to evaluate what position to take prior to H&M’s Q2 report due on June 25, 8:00am, CET.

    From a shareholder’s perspective, H&M is a tremendous company which has delivered consistent sales and net profit growth over the last 20 years or so. The average sales growth over the last four years has been 13% and EPS growth is even better: it has risen 110% from 8,8 SEK in 2003/04 to 18,5 SEK in 2008/09. These are truly impressive numbers.

    From a purely financial point of view, the reasons behind this performance are the following:

    New Stores

    Almost all of H&M’s growth comes from opening new stores. During the last four years, H&M’s store growth rate has been on par with the growth in sales (see table 1). The company target for this FY is to open another 225 stores, adding 13% to the total. But in equivalent H&M units, the average growth rate over the last three years has been a meagre 2%. Last year the sales per equivalent unit shrunk by 1%.

    Table 1: H&M past performance and estimates for 2008/09

    Table 1: H&M past performance and estimates for 2008/09

    Currency effects

    During the three years up to July 2008, the USD depreciated in total roughly 25% against the SEK (H&M’s reporting currency) and even more against the EUR. Since most of H&M’s purchasing volume is in USD and sales in the Euro zone account for more than 60% of the total, these currency effects have been favourable for H&M and are one big part of the explanation behind the stunning margin improvements.

    Q1 report

    Some highlights from the Q1 report (Dec-Feb):

    • Gross margin was 56,6%, down from 59,6% in Q1 07/08. According to H&M, unfavourable currency effects (e.g the USD rallied against the SEK during Sept-Dec 2008) knocked 4,2 percentage points off the margin.
    • Sales in Q1 were up 18% year on year. Most of this growth came from the Euro’s appreciation vs. the SEK; in local currencies sales only grew by 4% and shrunk by 5% for comparable stores. Unfortunately, currency effect is also visible in the gross margin, as most CoS items are paid for in USD (see the first bullet).
    • Germany, which accounts for 25% of the company’s revenue, is by far the biggest single market. See Table 2.
    Table 2: H&M top markets Q1 2008/09

    Table 2: H&M top markets Q1 2008/09

    Market expectations for the Q2 report

    According to SME Direkt, a market research firm, estimates from 20 analysts expect on average 20% sales growth and 3% EPS growth for the fiscal year 2008/09.  Injecting these figures into a DCF analysis, assuming  zero growth next fiscal year and a long term EPS growth of 5%, the FV turns out at 400 SEK.  The H&M share was down 2% on Monday June 22, from 365,50 to 358.  So are investors beginning to doubt the consensus estimates? Let’s have a look at an alternative view.

    Stretch Target alternative view

    In light of the performance in Q1, I would argue that the estimates above look rather optimistic. In Q1, the gross margin was 3 percentage points lower than last year. Due to currency effects, sure, but these are likely to remain. It is in the current financial environment not very likely that the SEK, which is a relatively small currency and hence sensitive to risk aversion, will gain massively against the USD during the next 6 months. It is instead reasonable to assume that the USD will remain around 8 SEK during this period. This would decrease the gross margin by three percentage points to 58,5%.

    A more conservative estimate of the sales figure would be 18% year-on-year due to currency effects. This would result in sales of 104,5 and resulting in an EPS of 16,7. Assuming the same EPS development as above, this yields a FV of 349 SEK.


    I find the alternative, more conservative, estimate to be more likely that the anayst consensus.  I believe that we may see the first signs of lower-than-expected margins and possibly sales in the Q2 report. A report lower than expectations is of course likely to have a negative effect on the H&M share price. I will sell H&M short down to 350 SEK (only 2,2% lower than now) prior to the report and close the position at 340 SEK if given the opportunity.

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  • Leveraged ETFs: Why the Bear decays more than the Bull in a flat market

    Posted on June 3rd, 2009 Peter Tjernström No comments

    In a previous post I have shown how the market volatility destroys the value of your leveraged ETF over time due to the fact that the funds are rebalanced daily in order to maintain a constant leverage.

    So, if the market trend is flat, the ETFs will lose value due to the inter (not intra) -daily movements around a certain index value. But if the index returns to the value X after one month of ups and downs, the loss in a Bull and Bear ETF would be the same, right?

    This is maybe the intuitive answer, but the fact is that the Bear will be much more hurt than the Bull in that example. The reason for this is quite simple, while the sum of index points variations is zero (the index is back at the starting value), the sum of the percentage loss with leverage is not equal to (it is smaller than) the sum of the percentage gain with leverage.

    Illustrated with an exemple: If the index gains 5% the first day to take it to 105 points, it needs to lose only 1-(100/105)=4,7619% on the next day in order to return to 100. Since a Bull ETF with 1,5 leverage gains 1,5*5%=7,5% on the first day and loses 1,5*4,7619%=7,1420% on the second day, while the reverse is true for the Bear, they start to divergate to the disadvantage of the Bear. This is illustrated in the graph below.

    click to enlarge

    click to enlarge

    Conclusion: the reasons to be careful with keeping Bear funds too long go beyond that of loss due to volatility. They have a built-in mechanism to make them lose compared to Bulls even in a completely flat market trend.


    Side note: the leveraged ETF topic has caught a lot of attention lately, but explainations in traditional business media are often messy, like this one (Swedish).

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