H&M's Marginal Gains: Can Store Optimization and Sustainable Strategies Drive Long-Term Profitability?

H&M, the Swedish fast-fashion giant, is at a critical juncture. After years of stagnant sales and margin pressures, the company is now touting a 4-percentage-point gross margin expansion to 54% in H1 FY24 compared to 50% in the prior year. Pair this with a disciplined store optimization plan—net closures of 60 stores in FY24—and a renewed focus on sustainability, and H&M is positioning itself as a survivor in a volatile retail landscape. But can these marginal gains translate into sustainable profitability, and does the stock offer value amid looming macro risks? Let's dissect the data.

Gross Margin Expansion – A Turning Point?

H&M's margin improvement is no accident. The company has aggressively optimized its supply chain, adopting RFID technology to reduce stock discrepancies and enhance inventory turnover. By focusing on core womenswear collections and sustainable materials (89% of materials now recycled/sustainably sourced), H&M has reduced markdown rates and stabilized pricing power. In Q4 FY24, gross margins hit 54.6%, a testament to these efforts.

But margin gains aren't universal. The U.S. market, which accounts for 15% of sales, faces headwinds from escalating tariffs. For instance, imports from China now face a combined 54% tariff, while Bangladesh and Vietnam see 37% and 46% levies, respectively. These tariffs threaten to erode margins further unless H&M can offset costs via supply chain reconfiguration or price hikes—a delicate balance given its price-sensitive customer base.

Store Optimization – Pruning for Profitability

H&M's store strategy is a masterclass in pragmatism. By closing 160 underperforming stores (mostly in mature markets like Western Europe) and opening 100 new ones in growth regions like Brazil, the company is prioritizing quality over quantity. The refurbishment of 250 key locations with RFID tech and sustainability features (e.g., LED lighting, repair services) aims to turn stores into profit centers rather than cost burdens.

Critically, H&M is aligning its physical presence with digital demands. Stores now double as hubs for online order pickups, returns, and localized inventory management. This hybrid model is a direct counter to e-commerce rivals like Shein, which lack the foot traffic and brand loyalty H&M still commands.

Navigating Macro Risks – Tariffs and Competitor Pressures

The U.S. tariff threat looms large. Analysts estimate tariffs could reduce 2025 operating margins by 2 percentage points unless H&M relocates production to lower-tariff regions (e.g., Turkey or Eastern Europe). Competitors like Zara are similarly strained but have already raised prices in the U.S. by ~20%, a move H&M resists to protect its affordability edge.

Meanwhile, H&M's cash flow remains a lifeline. Operating cash flow held steady at SEK 24.78 billion in FY24, providing a buffer to absorb near-term shocks. However, inventory levels rose 9% year-on-year due to supply chain disruptions (e.g., Red Sea logistics delays), a risk if demand softens further.

Valuation and Investment Considerations

At a forward P/E of 18x for 2025, H&M trades at a premium to its European peers like Zara (P/E 15x) but at a discount to its growth potential. The stock's 10% dividend yield (SEK 6.80 per share) and SEK 1 billion buyback signal confidence in long-term value.

Investors should weigh two factors:
1. Margin Resilience: Can H&M sustain 54%+ gross margins while absorbing tariffs and inflation?
2. Geographic Diversification: Brazil's untapped market (first store in 2025) and sustainability-driven brand revitalization could unlock new revenue streams.

Conclusion: A Cautious Buy for Long-Term Value

H&M's margin gains and store optimization are real steps toward profitability, but execution hinges on navigating tariffs and supply chain agility. The stock's valuation reflects hope, not certainty, and macro risks (e.g., a stronger Swedish krona) remain a drag.

Recommendation: For investors with a 3–5 year horizon, H&M offers asymmetric upside. Its cash flow stability, sustainability leadership, and strategic store reconfiguration position it to outlast weaker rivals. However, near-term volatility is inevitable. Consider a gradual position build below SEK 130, with a stop-loss below SEK 120.

In a sector where only the agile survive, H&M's focus on margins and sustainability could yet redefine its future—but the path to profit recovery remains narrow.