Financial Analysis of Hennes & Mauritz Ab

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Hennes & Mauritz AB

Antonino Conforto

Bruno Marty

1. Introduction

H&M Hennes & Mauritz AB (H&M) is a Sweden-based multinational retail-clothing company.

It operates under such brand names, as H&M, H&M Home, COS, Monki, Weekday, Cheap Monday and & Other Stories. It is engaged in the design, manufacture and marketing of clothing items and related accessories. The Company’s product range comprises clothing, including underwear and sportswear, for men, women, children and teenagers, as well as cosmetic products, accessories, footwear and home textiles.

2. Comments on the consolidated Income Statement:

a. Revenue

Revenue went up by 9 percent, in local currencies, for the financial year. Sales in comparable units were unchanged. In 2013 the revenue increased to SEK 128,562 m, an grew of 6 percent. But considering the period from 2008 to 2013 we can clearly see that the revenue is growing up by 45% from SEK 88,532 m to SEK 128,56 m. Surely we should ask what happened between the 2008-2009 because H&M’s growth was 14,5%.

The Group opened 275 stores and closed 25 stores during the financial year. Russia,  Beijing and Lebanon became new H&M markets during the year. At the same time H&M continued to develop internet and catalogue sales and concepts such as COS, Monki, Weekday and H&M Home. Internet and catalogue sales developed well during the year. H&M Home – fashion for the home – which was launched in February 2009 via internet and catalogue sales channels was well received. In 2009 H&M Home’s offering was complemented by a showroom on Drottninggatan in Stockholm where customers can purchase products directly.

By the way the online market is increasingly growing with particu­larly strong growth in mobile shopping via smartphones and tablets. In January 2013 the Group launched a completely mobile­ adapted H&M shop online in H&M’s existing eight online markets in order to accommodate this rapid develop­ment. In parallel with this, in autumn 2012 H&M intensified work on the future rollout of H&M shop online to other markets in the Group. The launch of H&M shop online in the US was rescheduled for summer 2013, mainly because more time was needed to adapt H&M shop online for the US market, but also due to the increased investments in mobile­ adapted shopping.

Comparing to the range period 2008-2013 the revenue is going up about 8% every year and H&M is growing successfully in existing markets and in new countries, with all its brands and through new concepts. Expansion includes both new stores and online sales. The target is to increase the number of stores by 10–15 percent each year while at the same time increasing sales in comparable units. In the last year H&M opened 356 new stores, it means one new store per day and H&M has 3200 stores on five continents. In these years It was improved the online store indeed nowadays It is available in nine countries including the US.

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Looking the future, we believe that the company could improve their revenue and it is guaranteed by the business concept of H&M which represents a strategic role. If we consider the net sales by continent we can clearly see that Europe represents the 79 in 2013:

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We should ask how a company that operates in Europe could improve its own revenue?

The European areas represent the most affected countries by economic crisis, so from my point of view in order to answer I am going to explain the Business Concept of H&M. It tries to offer clothes for women, men, teenager and children accessible to people all over the world without abandon the goal that is: good quality fashion. So in this period that the families suffer the crisis economic, they prefer to save money buying good clothes at low price and it is possible thanks to H&M.

How can they have good quality fashion with low price?

This is possible because H&M designs its own products, has no middlemen, buys the right product from the right market in large volumes, has efficient logistics and is cost-conscious in every part of the business.

How can keep their position in the market?

H&M’s designers, pattern makers and buyers work in teams to create the collections. Flexible planning of the product range and quick decision-making ensure that the collections are continually adapted to what customers want.

b. Gross Profit

The Group’s gross profit for the 2013 financial year amounted to SEK 76,033 m (71,871), an increase of 6 percent. The Gross Profit corresponds at 59% of the revenue and this value it was constant as always, It means that the relation between revenue and costs of goods did not change. We can say that the Gross Profit reflects what we said in the revenue. The last financial year was characterized by a strong sales development. Even if several market has “hard” macroeconomic situation, the company continued to grow with continued high profitability and increasing market share.

C. Operating Profit

The group’s profit from recurring operations was SEK 22,168 m, representing an increase of 2,42%. The operating margin as a percentage of revenue of 18% remaining stable compared with 2011 and 2012.

The Operating Profit is the difference between Gross profit and Operating Expenses.

We are going to explain these costs step by step:

-Selling and marketing expenses is composed by the cost of selling merchandise, salaries, commissions, and benefits to sales and marketing personal, warehouse costs and shipping cost. It was SEK 3,987 m in 2013, It was increasing about 10% year to year. The Selling and marketing expenses as a percentage of total cost of 92%-93% remaining stable from 2008. So we can see that the cost that the company has to pay mostly is by Marketing and Selling expense. This cost is composed above all by wages. In 2012 the number of employees was 72,276 m while nowadays It is 81,099 m so It means that It increased by 12,2%. We know that H&M is working in an open and dynamic market like cheap fashion. The company think that the best way in order to keep own position is encouraging the employees to work together to achieve shared goals because they can makes the difference H&M believes in open doors and allowing people to express their opinions freely. For example, any employee can discuss all work-related matters directly with her or his managers. For the employees, this means great opportunities to grow and develop within the company. In order to encourage them, the company established the H&M Incentive Program (HIP). HIP allows employees who have worked within the Group for at least five years to share in the increase in company profits, and until 2021 to share a gift donated by the Person family – H&M shares worth around SEK 1 billion. This gift is being distributed in stages each year until 2021.