H&M's Turnaround Hurdles: Valuation Risks and Margin Pressures in Q2 2025

H&M, the Swedish fast-fashion giant, faces mounting challenges as it navigates its Q2 2025 results amid a perfect storm of currency headwinds, tariff pressures, and margin erosion. While the company has emphasized strategic improvements in product offerings and sustainability, near-term execution risks and elevated valuation multiples suggest investors should proceed with caution. Let's dissect the key issues.

Sales Growth: A Modest Start with FX Dragging Reported Results

H&M's Q2 2025 revenue growth in local currencies is projected to rise just 1.5%, barely keeping pace with consensus expectations. However, the strengthening Swedish krona (SEK) is set to inflict a -5.5% foreign exchange (FX) impact, resulting in an overall reported revenue decline of 4.5%. This FX sensitivity underscores a critical vulnerability: while local sales hold steady in many markets, the SEK's appreciation against key currencies like the euro and dollar translates to top-line pain. Analysts have already trimmed 2025 revenue estimates by 2%, reflecting concerns over weak consumer demand in core markets such as the U.S., China, and Western Europe.

Margin Pressures: Tariffs, Markdowns, and Cost Discipline Under Strain

The real battleground is profitability. Gross margins, already under siege from increased markdowns and supply chain inefficiencies, are expected to deteriorate further. A key culprit is the SEK's strength, which inflates import costs for raw materials—a problem compounded by pending tariffs set to hit in Q3. These tariffs could force H&M to either absorb costs or raise prices, neither of which bodes well for margins. Analysts project a drop in the EBIT margin from 11.9% to 9.8%, with FX-related operating cost deleverage and rising marketing expenses exacerbating the pain.

While H&M's one-off cost saving of SEK 199 million (from 2024 restructuring) provides a slight tailwind, it's a drop in the bucket against structural headwinds. Supply chain improvements in H2 might stabilize gross margins, but even this hinges on uncertain demand recovery and tariff mitigation.

Valuation: High Multiples Meet Low Visibility

At P/E 20x and EV/EBIT 17x for 2025, H&M's valuation appears stretched relative to its operational reality. These multiples imply investors are pricing in a turnaround that hasn't materialized: Q1 2025 operating profit fell to SEK 1.2 billion (a 2.2% margin), and inventory rose 9% as supply chain snarls persisted. A discounted cash flow (DCF) analysis suggests limited upside, with the 2026 P/E target of 15x dependent on unproven margin recoveries and top-line growth.

The SEK 130 target price (vs. current levels) and "Reduce" recommendation from analysts highlight skepticism. Investors must ask: Is the premium justified for a company grappling with macroeconomic uncertainty and execution risks?

Strategic Priorities: Ambitious, but Unproven

H&M's long-term bets—women's collections upgrades, sustainability goals (a 56% emissions reduction by 2030), and omni-channel integration—are logical moves. However, these initiatives require time and capital. The dividend at SEK 6.80 per share remains stable, but there's no room for error with margins already thin. Until H&M proves it can navigate tariffs, FX, and consumer sentiment, these strategies remain theoretical.

Investment Recommendation: Proceed with Caution

The risks are clear:
1. Tariff Exposure: If Q3 tariffs force price hikes, demand could falter further.
2. FX Volatility: A stronger SEK could prolong reported revenue declines.
3. Margin Squeeze: Gross margin erosion and rising marketing costs may persist beyond 2025.

Given the high valuations and lack of near-term catalysts, investors are better served to reduce exposure to H&M. The "Reduce" stance aligns with the consensus, emphasizing that the stock's current pricing requires perfection—a tall order in today's uncertain retail landscape.

Final Take

H&M's Q2 2025 results will test its turnaround narrative. While the company is executing cost discipline, the external headwinds—tariffs, FX, and weak demand—outweigh the positives. At 20x P/E, the stock offers little margin of safety. Investors should wait for clearer signs of margin stabilization and top-line resilience before reconsidering exposure. For now, caution remains the watchword.