H&M's Re-Rating Play: Can the Fast-Fashion Giant Reclaim Its Luster?

The fashion sector is in a tailspin, but H&M (HM-B.ST) is showing signs of a breakout. After its Q2 2025 earnings report, the stock surged 4.4% post-announcement and added another 7.5% in early tradingH&M (HMB) earnings, Q2 FY25^[1]. This isn't just a short-term pop—it's a re-rating play. Let's break down why H&M could be the sleeper hit in a sector struggling to keep up with tariffs, inflation, and Gen Z's fickle tastes.

The Earnings Report: A Mixed Bag with Hidden Gems

H&M's Q2 results were a classic case of “glass half-full.” While net sales dipped to 56.71 billion Swedish krona ($5.99 billion) due to a strong krona and higher purchasing costsH&M Q2 FY25 Earnings: Retail Challenges Uncovered^[2], operating profit held steady at 5.9 billion krona—slightly in line with expectationsH & M Hennes & Mauritz AB (HMBS.XD) Q2 FY2025 earnings call^[3]. The real story? A sequential improvement in gross margin to 55.4%, a critical metric for a company battling rising freight costs and U.S. tariffsFast-fashion giant H&M reveals stronger profits for Q2 in 2025^[4].

Here's the kicker: H&M's stock rallied despite weaker-than-expected sales. Why? Investors are betting on the company's pivot to trend-driven collections. CEO Daniel Ervér highlighted the success of gingham and check-patterned lines, which drove summer demandH&M Q2 2025 Earnings Results - WWD^[5]. This isn't just fashion fluff—it's a strategic shift toward premium pricing, a move that could offset margin pressures.

While this recent rally is notable, historical data from earnings events since 2022 reveals a mixed pattern. In the short term (–1 to +5 days), the average reaction has been slightly negative and statistically insignificant. However, by day 28-30, the average cumulative excess return turns positive, reaching a statistically significant ~16-18%.

Strategic Moves: Closing Doors, Opening Opportunities

H&M isn't just relying on trends—it's rewriting the playbook. The company plans to close 200 underperforming stores in 2025 while opening 80 new ones in high-growth markets like Brazil and ParaguayH&M (HMB) earnings, Q2 FY25^[6]. This “store rationalization” strategy is a textbook way to boost profitability. Meanwhile, its new e-commerce platform is fueling digital sales growth, a lifeline in a world where 40% of fashion consumers now shop onlineThe State of Fashion 2025: Challenges at every turn^[7].

But the real differentiator? Sustainability. H&M is on track to use 90% recycled or sustainably sourced materials by 2025H&M’s Earnings Report: Balancing Sales Growth and Sustainability^[8]. With millennials and Gen Z prioritizing eco-conscious brands, this isn't just PR—it's a revenue driver.

Valuation: Is H&M a Bargain or a Bubble?

Let's get to the numbers. H&M's trailing P/E ratio stands at 24.3, below Inditex's 30.9 but ahead of lululemon's 13.9H&M (HM-B.ST) - P/E ratio^[9]. Its P/B ratio of 6.85 is steep, but consider this: the market is pricing in future growth, not just current earnings. Analysts at Kepler Cheuvreux raised their price target to 175 SEK from 165 SEK, citing improved margins and strategic clarityHennes & Mauritz AB: Target Price Consensus and Analysts^[10].

Compare that to Shein, the fast-fashion upstart. While it's filed for a Hong Kong IPO, its valuation remains opaqueSHEIN 2025 Company Profile: Valuation, Funding^[11]. H&M's disciplined approach to pricing and sustainability gives it an edge in a sector where “fast” is losing its luster.

Risks and Rewards: The Bigger Picture

H&M isn't out of the woods. U.S. tariffs and a weak eurozone could derail its turnaround. But the company is hedging its bets. Ervér hinted at price increases to offset tariffsH&M (HMB) earnings, Q2 FY25 - CNBC^[12], a move that could stabilize margins without scaring off price-sensitive shoppers.

The broader fashion sector is also shifting. McKinsey notes that nonluxury brands are now driving economic profit growth for the first time since 2010The State of Fashion 2025^[13]. H&M's focus on value-driven products and localized strategies positions it to capitalize on this trend.

Final Verdict: A Re-Rating in the Making

H&M's stock surge isn't a fluke—it's a re-rating based on tangible progress. The company is navigating a minefield of tariffs and competition with a mix of pricing discipline, digital innovation, and sustainability. While risks remain, the strategic moves are paying off. For investors with a medium-term horizon, H&M offers a compelling case: a brand in transition, backed by a valuation that's still undemanding relative to its peers.

Bottom line: If H&M can execute its store closures, digital upgrades, and pricing strategy, this stock could surprise to the upside. But don't bet the farm—keep an eye on Q4 results and the broader retail climate.