Financial Analysis: Effects of Economic Factors on the Performance of H&m

FINANCIAL ANALYSIS: EFFECTS OF ECONOMIC FACTORS ON THE PERFORMANCE OF H&M

Abstract

The scope of the investigation is the impact of the macroeconomic environment on the financial performance of fashion companies such as H&M which is the focus of this report.  The method used in the analysis was the comparison of the financial performance of H&M compared to the context of the macroeconomic environment relevant for H&M.  In this case, the G7 economies was used as the proxy for the market of H&M as the countries in the G7 economies together make up most of the revenues and business of H&M.

The findings showed that H&M is in a strong financial position.  The G7 markets have experienced low growth in recent years with high unemployment rates.  Despite this context, H&M has performed well with a stable set of financial metrics underpinning its performance.  The key issues for H&M are the minimal exposure to emerging market countries for growth and the lack of use of tax benefits available for the company.  H&M is financially strong and has a strong brand to rely on.  While the company is expected to continue to perform well, the recommendations to improve its performance include: considering a heavier skew of investment in emerging markets to support the growth of the company; taking on more debt to optimise the funding and enhance the returns of the company; and, leveraging the brand and taking greater risks in its strategic actions.  The recommendations can lead to higher growth and enhanced returns for the company.

Table of Contents

Abstract        2

1.        Introduction        4

2.                5

3.        Conclusion and Recommendations        9

REFERENCES        11

APPENDIX        13

List of Figures

Figure 1 – Stock Price Development of H&M Versus Key Competitors                p.4

Figure 2 – GDP Growth Rate G7 Economies, %                                        p.5

Figure 3 – Inflation Rate G7 Economies, %                                                p.6

Figure 4 – Unemployment Rate G7 Economies, %                                        p.7

Figure 5 – Interbrand Ranking for H&M, 2013                                                p.7

List of Tables

Table 1 – Selected Financial Metrics for H&M                                                p.8

Table 2 – H&M Strengths and Weaknesses                                                p.9

1.        Introduction

H&M’s beginning was a Hennes women’s clothing store established Sweden in 1947 (H&M, 2014A).  H&M’s ambition is to “always have the best customer offering in each and every market with H&M offering collections that are wide-ranging and varied for women, men, teenagers and children” (H&M, 2014B).  H&M is one of the top clothes retailers in Europe in general and in Western Europe in particular where 75% of its sales emanates from (Datamonitor, 2013).  H&M’s strong market position in Europe is supported by the presence of H&M in 53 countries where H&M has 3,100 stores in total (H&M, 2014C).  The growth of H&M in terms of markets and stores is shown in appendix A.

The stock price development of H&M versus its key competitors in the clothes retail sector in Europe can be seen in figure 1.  H&M was outperformed by other fashion companies such as Next PLC, Foot Locker, and The Gap, Inc in the appreciation of the share price when compared over the past three years.

Figure 1 – Stock Price Development of H&M Versus Key Competitors

[pic 1]

Source: Google Finance (2014)

2.        Financial Performance of H&M

The main markets of H&M are developed countries with most of the sales of H&M coming from these markets.  The top five markets of H&M are Germany, US, UK, France and Sweden (H&M, 2013A).  The top 20 markets for H&M and the details in terms of sales are presented in appendix B.  In reviewing the impact of macroeconomic factors, the report considers the G7 set of metrics for the analysis as Germany, US, UK and France - the top four countries of H&M - are part of the G7 group.  This is arguably a good representation of the main markets that make up a large part of the revenues and business of H&M.  

In terms of the impact of recession or, conversely economic growth, figure 2 shows the GDP growth rate of the G7 economies.  The G7 economies show relatively low GDP growth rates with two of the years in the past six years having negative growth rates.  Despite the low growth rates exhibited by the G7 countries, H&M continued to grow significantly during the period as shown in appendix A.  In the past year, despite a less than 2% GDP growth rate for the G7 countries, H&M opened many stores in Germany, US, UK and France as detailed in appendix B.  

Figure 2 – GDP Growth Rate G7 Economies, %

[pic 2]

Source: IMF (2014)

In the period from 2011 to 2012, H&M showed a 10% increase in sales from SEK110 billion to SEK121 billion.  The 10% increase is much higher than the less than 2% GDP growth rate exhibited by the G7 economies.  This shows the strength of the company in managing through a depressed economic growth environment.  The low growth market environment is also reflected in the low inflation rates seen in the G7 economies over the past few years.

Figure 3 – Inflation Rate G7 Economies, %

[pic 3]

Source: IMF (2014)

Aside from the poor GDP growth rates and the low inflation rates seen for the G7 economies which reflected the poor macroeconomic environment and low growth period, another metric which shows the challenging macroeconomic environment is the unemployment rate.  For the G7 economies the unemployment rate is presented in figure 4 which shows high unemployment rates experienced by the G7 economies in recent years even with the reduction in unemployment over the past two years.  Despite the high unemployment rates in the G7 economies, H&M was able to perform strongly with the relatively high growth in revenues in the past year.  This reflects the strength of H&M in its business and the extent of resilience of H&M in managing through the challenging macroeconomic environment. A key factor in this resilience is the strength of the H&M brand which was ranked number 21 among the top global brands as developed by Interbrand showing how well H&M has built the business globally (Interbrand, 2013).  The details of the Interbrand ranking for H&M are presented in figure 5.