H&M's Margin Strategy Under Siege: Can Trade Tensions Be Weathered?

H&M's latest financial results underscore the precarious balance between profit resilience and the escalating pressures of global trade tensions. While the retailer managed a slight recovery in local currency sales during Q2 2025, the underlying challenges—from punitive tariffs to supply chain inefficiencies—paint a grim picture for margins. With Q3 tariffs looming and operational costs rising, investors must weigh whether H&M's strategy to stabilize profitability can outlast these headwinds or if the brand's legacy of affordable fashion is now a liability.

Short-Term Tariff Headwinds Threaten Margins

H&M's Q2 results reveal a stark reality: tariffs and currency fluctuations are squeezing profits. Despite a modest 1% rise in local currency sales, the 5% drop in reported revenue to $5.99 billion (56.7 billion SEK) reflects the drag of a stronger Swedish krona. The operating margin inched up to 11.9%, but this masks deeper vulnerabilities. Analysts now project the EBIT margin to plunge to 9.8% in 2025, driven by three factors:
1. Impending Tariffs: New U.S. tariffs set to take effect in Q3 could force H&M to either absorb costs (eroding margins) or raise prices (risking sales).
2. FX Volatility: The SEK's strength has worsened import costs for raw materials, compounding gross margin pressures. The Q2 gross margin fell to 55.4%, down 0.9 points year-over-year.
3. Markdowns and Inefficiencies: Supply chain bottlenecks and overstocking have led to aggressive discounting, further compressing profitability.

Long-Term Sustainability: A Delicate Balancing Act

H&M's survival hinges on its ability to navigate a shifting landscape where cost discipline and sales growth must coexist. The company's focus on sustainability and omni-channel integration—key to competing with fast-fashion rivals like Inditex—remains unproven in the near term. While these initiatives could improve brand equity, they require sustained investment at a time when every cost dollar is scrutinized.

The bigger risk lies in external factors. U.S. trade policies remain unpredictable, and consumer spending on discretionary apparel is already weakening. Inditex, H&M's closest competitor, has also seen sales soften, signaling sector-wide fragility. For H&M, the path to margin stabilization requires:
- Tariff Mitigation: Securing exemptions or diversifying suppliers to reduce reliance on tariff-hit regions.
- Pricing Power: Testing whether consumers will accept higher prices without abandoning the brand.
- Operational Efficiency: Streamlining supply chains to minimize markdowns and inventory costs.

Valuation Risks and Investment Advice

H&M's current valuation appears stretched relative to its operational struggles. Trading at a P/E of 20x and an EV/EBIT of 17x for 2025, the stock reflects overly optimistic assumptions about margin recovery. Analysts' “Reduce” rating and a target price of SEK 130 (a 15% downside from current levels) highlight skepticism.

Investors should proceed with caution. While H&M's brand strength and global scale offer long-term potential, near-term risks—including unresolved trade disputes, currency volatility, and weak consumer demand—are too significant to ignore. The stock could rebound if tariffs are delayed or H&M demonstrates pricing power without sales slippage, but these are high bars.

Final Take: Cautious Engagement, If Any

H&M's story is one of resilience tested by forces beyond its control. For now, the data suggests a cautious stance is prudent. Investors seeking exposure to the fast-fashion sector may find better odds elsewhere, such as in peers with stronger pricing discipline or diversified supply chains. H&M's shares could be a speculative play only if trade tensions ease sharply—a scenario that remains far from certain. Until then, the path to profit resilience remains as tangled as the supply chains it must untangle.