H&M Selloff Caps a Dismal Quarter for European Fashion Retailers
H&M Selloff Caps a Dismal Quarter for European Fashion Retailers
(Bloomberg) -- Hennes & Mauritz AB’s dismal earnings update on Thursday is just the latest setback for shares of European clothing retailers as they end a second straight quarter of underperformance.
With a decline of 29%, Zara owner Inditex SA is heading for its worst quarter on record, following the fourth quarter’s 10% decline. H&M and Next Plc have fared only marginally better as skyrocketing energy prices following Russia’s invasion of Ukraine have sapped disposable incomes and led shoppers to reassess their discretionary spending.
Latest data showed a fall in consumer confidence in countries including the U.K., France and Germany as Europe faces the toughest energy crisis and the worst inflation shock in decades. In the past month, online furniture sellers Westwing Group SE and Made.com Group Plc have warned about weaker consumer demand. And sentiment suffered a further blow when H&M reported a sudden slowdown in sales growth, sending its shares plunging as much as 11% toward the lowest close in two years.
“The market’s concerned, first and foremost, on the impact on consumer confidence from the situation in Ukraine,” said Alan Custis, head of U.K. equities at Lazard Asset Management. Investors see higher living costs contributing to “a squeeze on discretionary spend.”
Those concerns have piled up and sent valuations sharply lower: Inditex shares trade at 17 times estimated earnings, compared with about 27 times a year ago. H&M’s multiple has fallen to 15 times from about 28.
For some, the worst may already be priced in.
“The stocks already discount this bad news and, to some extent, share prices are likely to be inversely influenced by energy prices as investors look through and focus on the eventual impact to disposable incomes,” said Alasdair McKinnon, chief investment officer of Sgurr Ventures. “Effectively this would mean that the share prices will be driven in the short term by the prospect for a resolution in the Ukrainian crisis.”
Most analysts see scope for a revival. Based on average price targets compiled by Bloomberg, they expect Inditex, H&M and Next shares to jump more than 30% over the next 12 months.
It’s “not all doom and gloom,” said JPMorgan Chase & Co.’s Georgina Johanan. “Low unemployment and catch-up spend in clothing should offer some support,” she wrote in a note Wednesday, adding that the total revenue lost for the sector over 2020 and 2021 represented about 30% of annual clothing spending in key European markets on average.
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