H&M's Turnaround Hangs on Margin Recovery and Regional Resilience

H&M's second-quarter results underscore the fragility of its turnaround narrative amid a challenging macroeconomic backdrop. While the fast-fashion giant managed to beat operating profit expectations, its sales decline and margin pressures raise critical questions about its ability to navigate structural headwinds. This analysis evaluates whether the stock presents a contrarian opportunity or remains a risky bet.

The Top-Line Struggles: Currency Headwinds and Store Closures

H&M reported a 4.9% drop in SEK-denominated sales to 56,714 MSEK, with currency effects shaving off 6 percentage points. Excluding store closures—a net reduction of 173 stores since Q2 2024—sales would have risen 3%. This highlights the trade-off between cost-cutting and growth: closures reduced capacity but did not offset the drag from a stronger krona and tepid demand in key markets like the Nordics and Eastern Europe.

Margin Pressures: The Elephant in the Room

The gross margin dipped to 55.4% (from 56.3% in 2024), with operating margins contracting to 10.4%, the lowest since 2019. Analysts point to three culprits:
1. Foreign Exchange (FX): A 5.5% revenue hit from currency fluctuations, with the krona's strength eroding competitiveness in export markets.
2. Tariffs and Supply Chain Costs: Rising purchasing costs from a strong dollar and freight expenses, compounded by strategic investments in product quality.
3. Markdowns: Inventory deleveraging—stock volume grew just 1% in Q2, down from 11% in Q1—suggests progress, but markdowns remain a threat as H&M adjusts to shifting consumer preferences.

The outlook is grimmer: the company projects a full-year operating margin of 9.8%, down from 11.9% in 2024. reveals a direct correlation between margin erosion and declining share price, underscoring the need for a turnaround in profitability.

Regional Performance: Southern Europe Shines, but Risks Linger

While Southern Europe delivered a 7% local-currency sales surge, driven by strong tourist flows and omnichannel integration, other regions faltered:
- Nordics: Sales dropped 4% in local currencies as domestic consumers face high inflation.
- Asia/Pacific: Store closures (-47 net) reflect weak demand, though local-currency sales grew 1%.
- Brazil Expansion: H&M plans to enter Brazil in late 2025, targeting 210 million consumers. This could diversify revenue but carries execution risks in a price-sensitive market.

Strategic Challenges: Can Sustainability and Digital Growth Offset Costs?

H&M's long-term bets—sustainability initiatives (e.g., phasing out fossil fuels) and online sales (now over 30% of revenue)—show promise. COS, its premium brand, grew 3%, proving the potential of portfolio diversification. However, these efforts require sustained investment, squeezing margins further.

Valuation and Risks: Overpriced for Uncertainty?

At a P/E of 20x and EV/EBIT of 17x, H&M's valuation assumes a rapid recovery. Analysts caution that these multiples are stretched given the likelihood of margin contraction and macro risks like rising interest rates and trade barriers. The consensus "Reduce" rating reflects skepticism about management's ability to stabilize profits.

Investment Considerations: Contrarian Play or Pass?

The stock offers a contrarian opportunity if:
1. Margins Stabilize: Cost controls and FX hedging mitigate the 9.8% margin forecast.
2. Inventory Improves: Further stock optimization reduces markdowns.
3. Growth Markets Deliver: Southern Europe and Brazil offset declines in core regions.

However, risks loom large: tariffs, a persistent strong krona, and consumer retrenchment could prolong the downturn.

Final Recommendation

H&M's shares are a speculative bet for investors willing to accept high volatility. Those with a long-term horizon might consider a small position at current valuations, but the macroeconomic uncertainties and margin pressures warrant caution. Monitor Q3 results for signs of stabilization in FX impacts and operating margins. For now, the stock remains risky, and a "Hold" rating seems prudent until clearer signs of recovery emerge.