Transcript
An alyst alyst Report: Report:
H&M Hennes & Mauritz AB 9 De D ecember cember 2011 Rotter Rotter dam dam School of M anageme anagement, nt, E r asmus asmus U ni ver ver si ty BK M 04ACA-11 04ACA-11 F in ancial ancial An alysis alysis Prof. Dr . Eri k Pee Peek
Written by: Joppe Out
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Marcel Du Ry
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Ivan Fartunov
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Di Piao
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB
Contents Introduction...................... Introduction............................................. ............................................. ............................................ ............................................. ............................................ ..................... 3 ................................................................... ............................................ ............................................ .................................... .............. 3 Strategy Analysis ............................................. Accounting Analysis ........................................... .................................................................. ............................................. ............................................ ................................ .......... 5 Financial Analysis ............................................. .................................................................... ............................................. ............................................ ................................ .......... 7 Prospective Analysis .......................................... ................................................................. ............................................. ............................................ ................................ .......... 9 Concluding Remarks .......................................... ................................................................. ............................................. ............................................ .............................. ........ 12 ................................................................. ............................................ ............................................ ............................................. ....................... 13 References: ........................................... Appendix .......................................... ................................................................ ............................................ ............................................ ............................................. ........................... .... 14 Appendix 1 – 1 – H&M H&M five year overview of key figures ........................................... .............................................................. ................... 14 Appendix 2 – 2 – Market Market share and geographic sales distribution of H&M in 2009 and 2010 ..... 14 Appendix 3 – 3 – Fashion Fashion triangle .......................................... ................................................................ ............................................ .................................. ............ 15 Appendix 4 – H&M unadjusted unadjusted standardized financial statements statements .......................................... ......................................... 15 Appendix 5 – 5 – H&M H&M Reported future rental commitments ............................................ ........................................................ ............ 17 Appendix 6 – 6 – H&M H&M detailed future rental payments schedule schedule ................................................. ................................................ 18 Appendix 7 - Adjustments - Adjustments to H&M’s financial statements statements ....................................................... ...................................................... 19 Appendix 8 – 8 – Adjusted Adjusted financial statements H&M .............................................................. .................................................................. ..... 20 Appendix 9 – 9 – Adjusted Adjusted standardized financial statements Inditex Inditex ................................. ........................................... ........... 23 Appendix 10 – 10 – Impact Impact of adjustments on leverage of H&M .................................................... ..................................................... 25 Appendix 11 – 11 – Key Key financial ratios comparison H&M and Inditex ......................................... Inditex ......................................... 26 Appendix 12 – 12 – H&M H&M sales growth drivers ......................................... ............................................................... ...................................... ................ 28 Appendix 13 – 13 – H&M H&M sales forecasts forecasts. .......................................................... ................................................................................ .............................. ........ 28 Appendix 14 – 14 – Forecasted Forecasted condensed Financial Statements Statements ........................................ ................................................... ............ 29 Appendix 15 – 15 – WACC WACC calculations (1) ............................................ .................................................................. ......................................... ................... 29 Appendix 16 – 16 – WACC WACC calculations (2) ............................................ .................................................................. ......................................... ................... 30 Appendix 17 - Estimates of Value of of Equity...................... Equity ............................................ ............................................. .................................. ........... 31 Appendix 18 - Estimated of Share Share Price beyond Terminal Year under two Scenarios Scenarios ............ ............ 31 Appendix 19 – 19 – Sensitivity Sensitivity analysis..................... analysis ........................................... ............................................ ............................................ ........................... ..... 32
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Introduction
H&M is a one of the leading global fashion retailers. The company started in Sweden more than 60 years ago and is nowadays present in more than 38 countries with over 2200 stores. Despite its global presence, H&M is relatively concentrated in the more mature Nordic and German markets where 40% of sales are coming from. In 2010, the company possessed a 0.9% share of the worldwide market for apparel retail (RSP value) 1 (Appendix 2). H&M´s H &M´s turnover in 2010 was SEK 108,483 million. A five-year overview of the company is presented in Appendix 1.
Strategy Str ategy anal ys ysii s
The business concept of H&M centres on providing “fashion and quality at the best price”. The company offers fashion products to a broad target group consisting of women, men, teenagers and children. One of H&M´s differentiating diffe rentiating factors is its cooperation with famous designers like Karl Lagerfeld and Viktor & Rolf to come up with fashionable new collections that generate a lot of attention in the fashion scene. H&M sells its products via retail, catalogue and internet sales and since 2006 on a franchise basis. Rather than owning its stores, the company makes use of lease arrangements. The company has an own design and buying department which creates the collections centrally. Via the concept of regional grouping – a concept in which products are purchased and distributed to a group of regional (sales) countries – products are allocated to the sales countries based on observed demand in each market. H&M buys it goods from about 700 independent suppliers, located in four different continents.2,3 Since a couple of years, the company makes use of a new format, Collection of Style (COS), a higher priced concept aiming to attract the ´older ´ customer. Also, the company plans to start internet sales in the USA by the end of 2011/beginning of 2012. 4 The global apparel retail market had a RSP value of 1,527 billion USD. 5 Since 2006, it grew at CAGR of 3.9% with the mature markets (Western Europe and North America) growing by only 0.4% annually. While the global growth is expected to slow down in the next 5 years, emerging markets are still going to account for most of it. 1
Passport database (2010) JP Morgan (2010) 3 DataMonitor (2011) 4 H&M Hennes & Mauritz AB (2010) 5 Passport database (2010) 2
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB The bargaining power of buyers is low to moderate. Virtually all H&M clients are individual consumers which gives them very little bargaining power. The low switching costs faced by customers in the industry and the ever increasing availability of information balance this to a certain degree, giving consumers some power. Suppliers bargaining power is low due to H&M’s wide range of suppliers. Furthermore, the switching costs for the company are r ather low. The low capital requirements of the industry and the lack of switching costs for the customers make the market lucrative for new entrants. H&M’s large network provides the company with a wide base for improving efficiency and building brand equity, which decreases the threat of new entrants. An industry-wide increase in advertising expenses indicates intensifying rivalry among existing firms. Currently, the only feasible substitute of retail clothing is the online sales medium. H&M, as well as other retailers, are progressively moving into that space, which we consider of being solely part of the evolving market rather than a real substitute. Recent market developments and future trends Internet – Internet – apparel apparel retail will continue to be strongly impacted by the internet . Going hand in hand with online retail, the use of multi-channel platforms represents an important trend. Internet and multi-channel sales are expected to account for most of the future growth. Because of that, it is unlikely that there will be significant a increase of retail floor space in the mature markets in the near future. Internationalization – thanks to the globalization, fashion around the world becomes more homogeneous than ever making international expansion easier. The major growth potential of the global market is centred on developing markets. Particularly interesting are the cases of Russia and China growing 10.2% and 8.8% respectively (for the period 2010-2013) 6. H&M is present in both of the fore mentioned markets but in Russia, it lags significantly behind Inditex which we identified as key competitor due to the similar size and internationalization profile. Competitive strategy Whereas H&M started with a cost-leadership strategy, the company seems to more and more undergo a transition towards differentiation (an example of this is the recent introduction of the higher-end fashion line COS). In terms of brand portfolio, H&M has diversified its portfolio in the last years by acquiring the fashion group FaBric Scandinavian AB in 2008. However, compared to the multi-brand strategy of Inditex, H&M still seems to rely heavily on its consolidated brand.
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JP Morgan (2010)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB H&M’s target is to increase number of shops by 10-15% 10 -15% annually while maintaining profitability levels. The principle for expansion followed by the company is that every store shall have the best commercial location.7 Although H&M has expanded globally, its most vital market is still Europe. For its 2011 expansion strategy, the company has identified China, the USA and the UK as its most important markets. The management recognizes the increasing importance of the Asia-Pacific region (entered in 2007 for the first time) while 2011, in addition to substantial investments in China, the company entered Singapore. In 2012, new franchise entries are planned for Indonesia and Thailand, which would be the first franchise outside the Middle East. Another key development expected in 2012 is the launch of the online shop in the USA – the largest online shopping market. 8 One of H&M’s strategic advantages is the is the short lead-times it maintains through a flexible-value chain sourced from over 700 suppliers mainly in Turkey and China. It distinguishes dist inguishes the company from its highly vertically-integrated main competitor Inditex. H&M’s H&M’s higher speed to market is very important for the fashion triangle format (Appendix 3) that t he company has adopted.
Accounti Acco unti ng A nalys nalysis is
In order to identify the key accounting policies, we investigated the company’s financial statements and its respective notes. With respect to its business model, our analysis retrieved that H&M’s main accounting policies are most closely related to inventories, non-current non -current tangible assets, and leased assets. Key accounting policies On basis of the current IFRS, management has certain freedom to influence reported inventories. Classically, an overstatement of this working capital position could increase gross profits as well as net income. For H&M, the recent increase in the company’s inventories raises concerns among analysts. Because of that, management might have rather an incentive to understate this post. However, this is offset by the fact that understatement would be associated with higher depreciation and a decrease in profitability. Since we consider that this lies out of the scope of management’s objectives, we believe that there is no motivation for motivation for misreporting inventories. The non-current tangible assets of the company are subject to depreciation. Due to IFRS, the determination of the useful life of an asset (and consequently the respective depreciation
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JP Morgan (2010) H&M Hennes & Mauritz AB (2011)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB rate/method) allows for a certain range of subjective estimation. In the case of H&M, we found the reported depreciation expenses as percentage of non-current tangible assets to be in line with the same measure of its identified closest industry peer Inditex. Hence, we consider that no adjustments concerning the depreciation are necessary. Leased assets can be either classified as operational leases or financial leases. Though the IFRS does provide guidelines with regard to this classification, they still incorporate a certain leeway of possible assumptions that management can make to distinguish between these two lease forms. H&M treats the report of its premise usage as rental agreements which in turn might be regarded as operational lease expenses. By doing so, the company significantly understates its liabilities (Appendix 4). We decided to adjust for that by transforming the respective rental agreements for the years 2009 and 2010 into financial lease positions. 9 Adjusting for financial lease position With respect to the asset distribution of H&M in 2010, total tangible fixed assets amounted to 15,469 SEKm or approximately 26.1% of total assets. The striking point is that rental costs for premises (analogically to operating lease leas e contracts for buildings and land) l and) in i n 2010 amounted to 12,891 SEKm (plus 229 SEKm per year classified as “Related Party Disclosure”) 10. These assets are of major economic importance for H&M but entirely omitted in the balance sheet. It is not obvious why management chose to omit this position and there are no indicators given whether the present accounting data appropriately reflects the business reality of H&M or whether they underlie strategic accounting choices or rigid accounting rules. A hypothetical explanation could be that management attempts to understate leverage since lease assets are booked against lease liabilities. This significant significant impact on H&M´s leverage leverage (from virtually no leverage to approximately 50% - Appendix 10) 10 ) may affect the company’s credit ratings which in turn could lead to an increase in its cost of debt. The financial analysis in section three provides a deeper insight into possible motives for management to keep this material position off-balance. Apart from strategic motives or overly rigid account rules, a transformation of these rental agreements into asset positions may increase comparability with industry peers who (e.g. Inditex) opted for its own specific reporting methods and an alternative portfolio of lease arrangements. Certainly, these adjustments would have also to be made for peer statements in order to make a meaningful comparison.
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H&M Hennes & Mauritz AB (2010) H&M classifies in its financial s tatements additional leased premises directly obtained from the Persson family. Members of this family include the founder of H&M, the cur rent CEO, and the current director of the supervisory board. Therefore, we regard these positions as assets of H&M. 10
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB H&M’s H&M’s distribution of expenses for premises for the years 2008 to 2010 is presented in Appendix 5. H&M additionally incurs variable sales-based rents. We omitted these accrued positions since respective sales are not reported so that a meaningful distribution is i s not possible. We distributed the related party disclosure expenses equally weighted over all years, assuming that H&M will continue to utilize them (these stores are situated in profitable key locations). Since H&M virtually does not use debt financing at all, we determined the company-specific discount rate of 2.7% through annual interest expenses over provisions for pensions (these represent the only non-current interest-bearing position of H&M). Although this interest rate might at first appear to be low, the fact that the firm has no debt could be interpreted as a signal of su perior creditworthiness. The tax rate of 25.3% was given directly within the company’s financial statements. A detailed outline of the adjustments for the years 2009 and 2010 as well as the respective condensed financial statements can be retrieved from Appendices 6 to 9.
F inancia inanciall Analys Analysis is
Profitablity A ratio analysis and a cash flow analysis were used to assess the performance of H&M and efficiency of the company’s operations and investment policies. For this reason, a time-series time -series comparison of 2009 and 2010 data of the most important ratios together with a cross-sectional comparison with its closest peer Inditex has been performed (Appendix 11). We employ return on equity (ROE) as an indicator to evaluate H&M’s overall profitability, since it captures how well managers are employing the funds invested by the shareholders to generate returns.11 The alternative decomposition of ROE is preferred over the traditional one because it provides a better identification of the key profitability drivers by separating operating and financing activities. Overall ROE for H&M increased from 44.5% (2009) to 46.5% (2010) with an increase in operating ROA as main driver. The identified closest peer Inditex achieved the same growth reaching ROE of 32.9% in 2010 and although Inditex achieved a higher operating ROA, their business suffered from negative financial leverage gains which offset its operating advantage. According to Bloomberg data, the non-adjusted industry average ROE is 17.8% (excluding outliers) and the non-adjusted industry median is 15.4%. This shows that both companies significantly outperform the industry which is an indication of a superior business model. 11
Palepu, Healy, Peek, (2010)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Looking at the financing policy on ROE, a small decrease in leverage has decreased the tax benefits of debt which in turn is partially p artially offset by an increasing incre asing spread due to higher operational profitability. Operating Management A slight increase in the NOPAT margin for H&M was observed in 2010. Inditex is still underperforming with regard to H&M but at the same time diminishing the gap through a higher growth. The EBITDA margins exhibit the same trends. To get a better understanding of the performance of H&M, we looked at the common-sized income statements. The improvement in NOPAT was driven mainly by a decrease in cost of materials and personnel expense. The former can be explained by an increase in retail space even in mature markets which H&M could penetrate through lower freight costs and the exploitation of spare capacities. A possible reason for the decrease in personnel expenses is the growing share of online sales while Inditex benefitted from a larger decrease in procurement costs due to a superior cost control policy. Tax and interest expenses for H&M incurred only marginal changes which indicate relatively stable financing conditions. Investment Management A difference between ROA and operating ROA (far larger operating ROA) is driven by asset turnover vs. net operating asset turnover. Because of the nature of the apparel retail business, the company has both, large cash holdings and significant current liabilities (mostly accounts payable and accrued expenses and other classified income). Net operating asset turnover for H&M has increased slightly (1.47) which indicates the higher efficient usage of company’s assets. company’s assets. Here, main competitor Inditex showed a clear advantage in this measure (2.02). Furthermore, its improvement was larger in comparison to H&M. In 2010, H&M experienced a decrease in both, trade receivables turnover and inventories turnover since they seemingly managed to roll these over to the suppliers and evenly decreased their trade payables turnover from 10.61 to 10.14. Nevertheless, the fundamental driver of the large increase in operating working capital turnover is the tax policy adopted by the company (Increase of current tax liabilities by 1865 million SEK in 2010). Operating working capital turnover is negative for Inditex due to significantly lower payable trade turnover. We detected a slight increase in efficiency of non-current assets (almost entirely consisting of PP&E) usage due to the fact that online sales become more prevalent in H&M´s business model. For Inditex the same trend can be observed whose improvement is again slightly larger.
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Financial Management Management H&M´s H&M´s liquidity ratios deteriorated slightly in 2010. However, the company maintains a comfortable buffer against short-term liquidity risk and outperforms its main competitor Inditex in these fields. In 2010, H&M decreased its financial leverage (post adjustments) by 10% to 55%. Prior to our implemented financial lease leas e adjustment, the company had virtually virtuall y no leverage (Debt-to-capital 0.4% in 2010) while after accounting for the rental agreements as financial lease liabilities, this dramatically changed (Debt-to-capital 44.5% in 2010). In terms of interest coverage ratios, H&M and its competitor Inditex are both sit uated in an obviously safe position. Sustainable growth rate To assess the dividend policy implemented by H&M we looked at the sustainable growth rate of the company. A decrease in the dividend payout rate paired with the already mentioned increase in ROE led to a boost in the sustainable growth rate in 2010 to 18.7% which exceeds the 12% CAGR (sales) of H&M over the periods 2006 – 2010. 2010. The non-adjusted sustainable growth rate of the company is 12.3% which is in line with the actual achieved performance. This discrepancy might represent another rationale behind the omission of the rental premises from balance sheet items: investors might demand a higher dividend payout. Due to a lower payout rate, Inditex achieved a higher sustainable growth rate despite i ts lower ROE. Cash flow analysis In 2010, the cash flows from operating activities for H&M grew by 21% signifying a healthy operating state of the company. This gain was partially offset by higher investments in shortterm investments and increased dividends (despite decrease in payout ratio). As a final outcome, the total cash-flow for the year improved compared to 2009 but remai ned negative.
Pr os ospe pecti ctive ve An alysis
General outlook H&M shows a strong historical firm performance. Being the current world leader in specialty retail with strong brand recognition and high growth expectations due to international expansion, H&M managed to establish a solid foundation of producing continuously abnormal returns. Its upscale position in the market has proven its firm stand so that future premium prices could maintain their beneficial influence on profit margins. mar gins. Going hand in hand with that, the profitable expectations of the online sale segment might contribute to the increasingly efficient usage of the company’s assets and hence, further strengthen operating profits.
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB H&M’s management was able to react swiftly to environmental de velopments with strong investments in IT and marketing and a shift in geographical focus towards profitable emerging markets (mainly Russia, China, Turkey, and Israel). A successful replication of H&M’s business model in these regions might offset or even outweigh the negative effects on profit margins due to the aftermath of the crisis crisi s within the traditional markets (and segments), Europe and the US. Possible drawbacks are the high input costs due to the current shock in cotton prices and monetary risks due to exchange rate fluctuations. Although the shock in cotton prices might tend to revert back, inflationary input costs could materialize into a long-term effect. Forecast horizon and terminal value assumptions assumptions We consider a forecast horizon of 5 years as adequate which leads to the assumption that H&M will finally arrive in 2015 at its steady-state. Although being relatively short, we view this time frame as reasonable due to the following arguments. H&M has clearly outlined its plans for the upcoming periods which, amongst others, comprise the foray into the new market segment of online sales and the increase of its exposure to international markets with focus on emerging economies. We have incorporated these effects into our growth driver predictions while expecting that their beneficial influences are going to settle in a relatively short time frame due to the lack of non-imitability. Since the company has not outlined further expansion plans, we assume that the status in 2015 will maintain perpetually. It is arguable to state that the omission of future shocks in profitability, either in favour (e.g. successfully establishing a competitive position in the underserved high-demand market of plus size apparel in i n the US) or against H&M (e.g. negative developments of input prices) is not perfectly precise. However, approaching from an earnings-model perspective, we consider it as reasonable to stabilize our forecast by anticipating that these “abnormal” developments may cancel each other out in the long-term long -term (if not simultaneously, then on an accrued basis). Moreover, we expect H&M´s high brand exposure in combination with the company´s economies of scale to persist as a solid shield against competitive forces that will preserve its current leading position on the market. The bottom line of all these arguments leads to our terminal value assumption: H&M´s abnormal earnings growth will endure while the firm´s growth in sales in sales in the terminal year will gradually settle upon the average industry growth of retail apparel (with curr ent competitive earnings level). Prediction of condensed financial statements To predict the condensed financial statements for the years 2011 – 2011 – 2015 2015 (Appendix 14), we have forecasted the sales growth rate for these years and related all other numbers to sales. H&M acknowledged in their annual report that they plan to increase the number of shops per year with
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB 10-15%. Therefore, we have identified as sales driver the yearly the yearly growth rate in shops (based shops (based on observed yearly growth rates in shops between first nine month 2011 and 2010). The sales-pershop ratio has declined slightly over the last two years (Appendix 12). However, since H&M reports internet sales under its sales per shop, we expect that the observed decline in physical sales-per-shop is partly being offset by an increase in the online sales-per-shop. As net effect, we assume that yearly sales growth is driven by the combination of the increase in the yearly growth rate in shops (per region) and the decrease in sales-per-shop (per region). Using the assumption that sales growth driven by new openings contributes on average half a year of sales, we expect that the yearly sales growth rate will increase from 0.4% in 2011 to 3.1% in 2013 (Appendix 13). We expect that the terminal value year assumptions holds and predict that the sales growth rate will slightly decline to the average retail apparel industry growth rate of 2.2% in 2014/15. 12 One of the most important drivers that influence our forecasted financial statements concerns H&M’s cost of materials. Overall, we expect that an increase in value chain efficiency would balance the out the inflation pressure on input costs. In the short term however (2011/12), we expect that the recent spike in the price of cotton 13 (which accounts for about 40% costs of materials in the apparel industry) will impact the company´s profit margins negatively. negatively. With respect to personnel expenses, we foresee a slight decrease over the forecast period and a constant margin thereafter. Firstly, due to the increasing importance of internet sales we expect that, relatively to sales, less personnel is required. Secondly, the fact that H&M is more and more expanding into regions with lower salary levels most likely will lead to a decrease in personnel expenses relative to sales. We expect that the non-current assets to sales ratio and other operating expenses will remain constant. The operating working capital to sales ratio will not be affected by possible increases in days’ receivables and days’ inventories since until now H&M has been able to roll these increases over to its suppliers by increasing days’ payables. Finally in 2009, 2009, H&M altered its exchange rate risk hedging strategy increased the level of cash and cash equivalents substantially. The higher level of these fair value assets decreased leverage in 2010. Since we expect that H&M will stick to its level of hedge protection, we assume the net debt to net capital ratio to remain constant in the future. Resulting from these assumptions, the NOPAT margin for H&M will decrease from 21.2% in 2010 to 20.5% in 2011 and 2012 after which it again rises to t o 21.3% between 2013 and 2015.
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DataMonitor (2011) Index Mundi (2011)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Calculation of WACC Using the procedure described in (Appendix 15), we obtained an equity beta of 0.34 for H&M. Our estimate seemed unreasonably low compared to the betas reported by FT (0.55), Reuters (0.56) and Thomson One Banker (0.53) so that we have chosen to use an equity beta equal to the average of the equity beta’s from FT, Reuters and Thomson One Banker which is 0.55. For the risk-free rate, we employ a value of 2.78% based on the average yield on 10-year Swedish government bonds between April 2010 and October 2011. As a risk premium, we have taken the worldwide historical average of 5.5%. 14 Using those values, the traditional CAPM equation yields a cost of equity of 5.79%. For the cost of debt we resorted to the 2.7% mentioned earlier in the report. Using the cost of debt and equity, the net debt and market value of equity levels, we obtain a WACC of 5.48% (Appendix 16). Estimation of H&M´s equity value To estimate the equity value, we have applied three different valuation models: the discounted cash flow model, the abnormal earnings model and the abnormal earnings growth model. We assume the sustainable sales growth rate after the terminal year to remain at 2.2% (in real terms) with a discount rate equal to the firm´s firm´s cost of equity of 5.79% which means that we expect H&M to persistently generate competitive abnormal earnings. Looking at the outcomes of the three models, we see that all models arrive at the same equity value of 588,258.55 SEK m (Appendix 17, Appendix 18).
Concludi ng r emark s
On basis of all three valuation models, we determine an equity value of SEK 355.43 per share which represents an upward potential of 51.6% (based on the price on 30 November 2010). The valuation presented in this report is based on a series of assumptions that are not to be considered 100% accurate. The main reason for the deviation of our estimate from the market is in our view an underestimation of the required rate of return (we consider it to be equal to the cost of equity of H&M). The sensitivity analysis (Appendix 19) indicates that in the vicinity of a reasonable discount rate of 8%15, our valuation would be in agreement with the market price levels during the last year. Another explanation could be an overestimation of the terminal growth rate that we implied in our model. 14
Palepu, K.,Healy, P., Peek, E., (2010) JP Morgan (2011)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB References:
(2011), Global Textiles, Apparel & Luxury Goods DataMonitor (2011), Global
Euromonitor (2011), Global Industry Overview: Apparel, Retrieved from: http://www.youtube.com/watch?v=IDyjBEAGybE, Accesed http://www.youtube.com/watch?v=IDyjBEAGybE, Accesed : 21.11.2011
H&M Hennes & Mauritz AB (2011), H&M (2011), H&M nine month report 2011 H&M Hennes & Mauritz AB (2010), Annual (2010), Annual Rpeort 2010 H&M Hennes & Mauritz AB (2009), Annual (2009), Annual Rpeort 2009 H&M Hennes & Mauritz AB (2008), Annual (2008), Annual Rpeort 2008 JP Morgan (2011), General Retail H2 outlook 28 September 2011 JP Morgan (2010), European (2010), European Apparel 28 October October 2010 IndexMundi (2011), Retrieved (2011), Retrieved from: http://www.indexmundi.com/commodities/, Accesed : 18.11.2011
Inditex Group (2010), Annual (2010), Annual Report 2010 Inditex Group (2009), Annual (2009), Annual Report 2009 (2010), Retrieved from: http://www.portal.euromonitor.com, http://www.portal.euromonitor.com, Accesed Accesed : Passport database (2010), Retrieved 18.11.2011
Palepu, K.,Healy, P., Peek, E., (2010), Business (2010), Business Analysis and Valuation: IFRS Edition, Second edition, South-Western Cengage Cengage Learning Learning
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix
Appendix Appe ndix 1 – H & M fi ve ye year ar over over view of key fi gur es 2010
2009
2008
2007
2006
Sales (SEK m)
108,483
101,393
88,532
78,346
68,400
EBITDA (SEK m)
27,720
24,474
22,340
20,196
16,922
ROE %
44.1%
42.2%
44.3%
45.4%
40.2%
Employees Employees ('000)
59,440
53,476
53,430
47,029
40,855
Number of shops shops
2,206
1,988
1,738
1,522
1,345
Source: H&M Hennes & Mauritz AB Annual Report (2010)
Appendix Appe ndix 2 – M ark et shar shar e and geog geogrr aphic sales sales distri bution of H & M in 200 2009 9 and 2010 2010
Figure 1: Market share of the five biggest Apparel retailers Source: Passport database (2010)
Figure 2: H&M Sales by geographic region Source: H&M Hennes & Mauritz AB Annual Reports (2010, 2009)
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 3 – F as ashi hi on tri angle
Source: JP Morgan European Apparel 28 October 2010
Appendix Appe ndix 4 – H & M unadju ste ted d standardize standardized d fi nancial state tateme ments nts Income statement (SEK m)
2010
2009
Sales
108,483.0
101,393.0
Cost of materials (nature)
(65,088.4)
(62,180.1)
Personnel expense (nature)
(14,216.0)
(13,576.0)
(3,611.0)
(3,019.0)
(908.6)
(973.9)
24,659.0
21,644.0
Investment Investment income
0.0
0.0
Other income, net of other expense
0.0
0.0
349.0
459.0
Profit before taxes
25,008.0
22,103.0
Tax expense
(6,327.0)
(5,719.0)
Profit after taxes
18,681.0
16,384.0
Minority interest
0.0
0.0
18,681.0
16,384.0
Depreciation and amortization (nature) Other operating income, net of other operating expense Operating profit
Net interest expense expense (income) (income)
Net profit
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Balance Sheet (SEK m)
2010
2009
15,469.0
14,811.0
Non-Current Intangible Intangible Assets
1,198.0
1,674.0
Deferred Tax Asset
1,065.0
1,246.0
Other Non-Current Assets
518.0
551.0
Total non-current assets
18,250.0
18,282.0
4,587.0
3,816.0
11,487.0
10,240.0
8,167.0
3,001.0
Cash and Marketable Securities
16,691.0
19,024.0
Total current assets
40,932.0
36,081.0
TOTAL ASSETS
59,182.0
54,363.0
0.0
0.0
Ordinary Shareholders’ equity
44,172.0
40,613.0
Total shareholders’ equity
44,172.0
40,613.0
0.0
0.0
Non-Current Debt Debt
257.0
622.0
Deferred Tax Liability
906.0
2,038.0
0.0
0.0
1,163.0
2,660.0
0.0
0.0
Trade Payables
3,965.0
3,667.0
Other Current Liabilities
9,882.0
7,423.0
Total current liabilities
13,847.0
11,090.0
TOTAL EQUITY AND LIABILITIES
59,182.0
54,363.0
ASSETS Non-Current Tangible Tangible Assets Assets
Trade Receivables Receivables Inventories Other Current Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares
Minority Interest
Other Non-Current Liabilities (non interest bearing) Total non-current liabilities
Current Debt
16
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Cash flow statement items (SEK m)
2010
2009
Profit Before Interest and Tax
25,008.0
22,103.0
Taxes Paid
(5,451.0)
(6,468.0)
Interest Paid
0.0
0.0
Non-Operating Gains (Losses) (Losses)
0.0
0.0
Non-Current Operating Operating Accruals Accruals
3,064.0
2,856.0
Net (Inv)/Liquidation (Inv)/Liquidation of Operating Working Working Capital
(783.0)
(518.0)
(10,129.0)
(8,755.0)
0.0
0.0
(13,239.0)
(12,825.0)
0.0
0.0
(1,530.0)
(3,607.0)
Net (Inv)/Liquidation (Inv)/Liquidation of Operating Non-Current Non-Current Assets Assets Net Debt (Repayment) (Repayment) or Issuance Issuance Dividend (Payments) (Payments) Net Share (Repurchase) (Repurchase) or Issuance Issuance Net change in cash and cash equivalents
Source: H&M Hennes & Mauritz AB Annual Report (2010)
Appendix Appe ndix 5 – H & M Re Repo porr te ted d fu tur e r ental commitments commitments Future rental commitments16 (SEK m)
Current commitments commitments Due in one year Due in 2-5 years Due more than 5 years ahead
2010
12,891 (+229) 9,546 (+229) 27,255 (+229 p.a. ) 17,818 (+229 p.a.)
2009
12,249 (+193) 9,383 (+193) 26,416 (+193 p.a) 18,546 (+193 p.a)
2008
9,776 (+156) 8,918 (+156) 26,368 (+156 p.a.) 18,728 (+156 p.a.)
Source: H&M Hennes & Mauritz AB Annual Rpeorts (2010,2009,2008) (2010,2009,2008)
16
Includes adjustment for the properties mentioned in Related Party Disclosure p.a. stands for per annum
17
17
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB 18
Appendix Appe ndix 6 – H & M de detail tail ed fut ur e r ental payments payments sche schedule dule Rental Agreements 2010 (SEK m)
Year
Payment due
Lease/Rental Lease/Rental expense 2010
2010
13,120.0
"Less than one year"
2011
9,775.0
"2-5 years''
2012
7,042.8
"2-5 years''
2013
7,042.8
"2-5 years''
2014
7,042.8
"2-5 years''
2015
7,042.8
'More than 5 years''
2016
7,042.8
'More than 5 years''
2017
7,042.8
'More than 5 years''
2018
4,021.5
NPV of the leased asset Rental Agreements 2009 (SEK m)
50,288.7 Year
Payment due
Lease/Rental Lease/Rental expense 2009
2009
12,442.0
"Less than one year"
2010
9,576.0
"2-5 years''
2011
6,797.0
"2-5 years''
2012
6,797.0
"2-5 years''
2013
6,797.0
"2-5 years''
2014
6,797.0
'More than 5 years''
2015
6,797.0
'More than 5 years''
2016
6,797.0
'More than 5 years''
2017
5,145.0
NPV of the leased asset Rental Agreements 2008 (SEK m)
49,693.5 Year
Payment due
Lease/Rental Lease/Rental expense 2008
2008
9,932.0
"Less than one year"
2009
9,074.0
"2-5 years''
2010
6,748.0
"2-5 years''
2011
6,748.0
"2-5 years''
2012
6,748.0
"2-5 years''
2013
6,748.0
'More than 5 years''
2014
6,748.0
'More than 5 years''
2015
6,748.0
'More than 5 years''
2016
5,388.0
NPV of the leased asset
49,140.0
Source: Own Estimates
18
All numbers include Related Party Disclosures
18
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 7 - Adjustments Adjustments to H & M ’s financial statements Adjustments (SEK m) Balance Sheet
2010
Assets
2009
Liabilities
Assets
Liabilities
Non-current tangible assets
Beginning capitalization
49,693.5
9,140.0
New leases leases
12,632.0
11,913.7
Annual depreciation
(7,001.2)
(6,887.1)
Non-current debt
Beginning debt
49,693.5
49,140.0
New leases leases
12,632.0
11,913.7
(11,607.7)
(10,954.4)
Deferred tax liability
1,165.5
1,029.0
Shareholders' equity
3,441.1
3,038.3
Debt repayment repayment
55,324.3
55,324.3
54,166.6
54,166.6
Income Statement Cost of sales
Lease expense
(13,120.0)
(12,442.0)
Depreciation expense
7,001.2
6,887.1
Interest expense
1,512.3
1,487.6
Tax expense
1,165.5
1,029.0
Net profit
3,441.1
3,038.3
Discount rate for both yrs
2.70%
Tax rate for both yrs
25.30%
Source: Own Estimates
19
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 8 – A djus djuste ted d fi nancial state stateme ments nts H& M Income statement (SEK m)
2010
2009
Sales
108,483.0
101,393.0
Cost of materials (nature)
(40,214.0)
(38,919.0)
Personnel expense (nature)
(14,216.0)
(13,576.0)
Depreciation and amortization (nature)
(10,612.2)
(9,906.1)
Other operating income, net of other operating expense
(12,663.0)
(11,793.0)
30,777.8
27,198.9
Investment Investment income
0.0
0.0
Other income, net of other expense
0.0
0.0
Net interest expense expense (income) (income)
(1,163.3)
(1,028.6)
Profit before taxes
29,614.5
26,170.3
Tax expense
(7,492.5)
(6,748.0)
Profit after taxes
22,122.0
19,422.3
Minority interest
0.0
0.0
22,122.0
19,422.3
2010
2009
108,483.0
101,393.0
Net Operating Profit after Tax
22,991.0
20,185.7
Net profit
22,122.0
19,422.3
869.0
763.4
22,991.0
20,185.7
– Net – Net Interest Expense after Tax
869.0
763.4
= Net interest expense (income) (income)
1,163.3
1,028.6
x (1 – (1 – Tax Tax expense/pre-tax expense/pre-tax income)
74.7%
74.2%
= Net Interest Expense after Tax
869.0
763.4
22,122.0
19,422.3
0.0
0.0
22,122.0
19,422.3
Operating profit
Net profit
Condensed Income Statements (SEK m) Sales
+ Net interest expense after tax = Net operating profit after tax
= Net Profit
– Preferred – Preferred stock dividends = Net Profit to Common
20
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Condensed Balance Sheet (SEK m)
2010
2009
70,739.3
68,977.6
Non-Current Intangible Intangible Assets
1,198.0
1,674.0
Deferred Tax Asset
1,065.0
1,246.0
Other Non-Current Assets
518.0
551.0
Total non-current assets
73,520.3
72,448.6
4,587.0
3,816.0
11,487.0
10,240.0
0.0
0.0
Cash and Marketable Securities
24,858.0
22,025.0
Total current assets
40,932.0
36,081.0
114,452.3
108,529.6
0.0
0.0
Ordinary Shareholders’ equity
47,613.1
43,651.2
Total shareholders’ equity
47,613.1
43,651.2
0.0
0.0
50,920.7
50,353.3
2,071.5
3,067.0
0.0
368.0
52,992.2
53,788.3
0.0
0.0
Trade Payables
3,965.0
3,667.0
Other Current Liabilities
9,882.0
7,423.0
Total current liabilities
13,847.0
11,090.0
114,452.3
108,529.6
ASSETS Non-Current Tangible Tangible Assets Assets
Trade Receivables Receivables Inventories Other Current Assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares
Minority Interest Non-Current Debt Debt Deferred Tax Liability Other Non-Current Liabilities (non interest bearing) Total non-current liabilities
Current Debt
TOTAL EQUITY AND LIABILITIES
21
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Ending Net Working Capital (SEK m)
2010
2009
4,587.0
3,816.0
11,487.0
10,240.0
0.0
0.0
– Trade – Trade payables
3,965.0
3,667.0
– Other – Other current liabilities
9,882.0
7,423.0
2,227.0
2,966.0
70,739.3
68,977.6
1,198.0
1,674.0
518.0
551.0
0.0
0.0
1,006.5
1,821.0
0.0
368.0
= Ending Net Non-Current Assets
71,448.8
69,013.6
= Total Assets
73,675.8
71,979.6
0.0
0.0
+ Non-current debt
50,920.7
50,353.3
– Cash – Cash
24,858.0
22,025.0
26,062.7
28,328.3
0.0
0.0
+ Ending Shareholders’ Equity
47,613.1
43,651.2
= Total Net Capital
73,675.8
71,979.5
Trade receivables receivables + Inventories + Other current assets
= Ending Net Working Capital + Ending Net Non-Current Assets
Non-current tangible tangible assets + Non-current intangible assets + Other non-current assets – Minority – Minority interest – Deferred – Deferred taxes – Other – Other non-current liabilities (non-interest- bearing)
Ending Net Debt
Current debt
= Ending Net Debt + Ending Preference Shares
Source: Own Estimates
22
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 9 – Adj uste usted d standar standar dize dized d fi nanci al stateme statements nts I ndi tex
Income statement (EUR '000)
2010
2009
Sales
12,526,595.0
11,083,514.0
Cost of materials (nature)
(5,104,573.0)
(4,755,505.0)
Personnel expense (nature)
(2,009,429.0)
(1,791,632.0)
Depreciation and amortization (nature)
(1,084,553.1)
(1,031,386.4)
Other operating income, net of other operating expense
(1,174,310.0)
(1,028,156.0)
3,153,729.9
2,476,834.6
13,651.0
4,842.0
0.0
0.0
(53,782.0)
(68,258.6)
Profit before taxes
3,113,598.8
2,413,417.9
Tax expense
(817,909.2)
(614,407.4)
Profit after taxes
2,295,689.7
1,799,010.6
Minority interest
(9,451.0)
(7,783.0)
2,286,238.7
1,791,227.6
2010
2009
12,526,595.0
11,083,514.0
Net Operating Profit after Tax
2,325,892.8
1,842,108.9
Net profit
2,286,238.7
1,791,227.6
39,654.1
50,881.4
2,325,892.8
1,842,108.9
– Net – Net Interest Expense after Tax
39,654.1
50,881.4
= Net interest expense (income) (income)
53,782.0
68,258.6
x (1 – (1 – Tax Tax expense/pre-tax expense/pre-t ax income)
73.7%
74.5%
= Net Interest Expense after Tax
39,654.1
50,881.4
2,286,238.7
1,791,227.6
0.0
0.0
2,286,238.7
1,791,227.6
Operating profit
Investment Investment income Other income, net of other expense Net interest expense expense (income) (income)
Net profit
Condensed Income Statements (EUR '000) Sales
+ Net interest expense after tax = Net operating profit after tax
= Net Profit
– Preferred – Preferred stock dividends = Net Profit to Common
23
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Condensed Balance Sheet (EUR '000)
2010
2009
6,719,578.2
6,653,031.9
Non-Current Intangible Intangible Assets
704,789.0
678,235.0
Deferred Tax Asset
299,350.0
234,203.0
Other Non-Current Assets
222,346.0
185,669.0
Total non-current assets
7,946,063.2
7,751,138.9
481,844.0
421,781.0
1,214,623.0
992,570.0
72,593.0
109,334.0
Cash and Marketable Securities
3,433,452.0
2,420,110.0
Total current assets
5,202,512.0
3,943,795.0
13,148,575.2
11,694,933.9
0.0
0.0
Ordinary Shareholders’ equity
6,940,592.7
5,806,039.6
Total shareholders’ equity
6,940,592.7
5,806,039.6
36,984.0
41,380.0
2,691,263.4
2,810,299.0
Deferred Tax Liability
410,252.2
377,266.4
Other Non-Current Liabilities (non interest bearing)
394,575.0
354,989.0
3,496,090.5
3,542,554.4
2,682.0
35,058.0
2,458,857.0
2,103,029.0
Other Current Liabilities
213,368.0
166,873.0
Total current liabilities
2,674,907.0
2,304,960.0
13,148,575.2
11,694,933.9
ASSETS Non-Current Tangible Tangible Assets Assets
Trade Receivables Receivables Inventories Other Current Assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares
Minority Interest Non-Current Debt Debt
Total non-current liabilities
Current Debt Trade Payables
TOTAL EQUITY AND LIABILITIES
24
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Ending Net Working Capital (EUR '000)
2010
2009
481,844.0
421,781.0
1,214,623.0
992,570.0
72,593.0
109,334.0
2,458,857.0
2,103,029.0
213,368.0
166,873.0
(903,165.0)
(746,217.0)
6,719,578.2
6,653,031.9
+ Non-current intangible assets
704,789.0
678,235.0
+ Other non-current assets
222,346.0
185,669.0
36,984.0
41,380.0
– Deferred – Deferred taxes
110,902.2
143,063.4
– Other – Other non-current liabilities (non-interest- bearing)
394,575.0
354,989.0
= Ending Net Non-Current Assets
7,104,252.1
6,977,503.5
= Total Assets
6,201,087.1
6,231,286.5
2,682.0
35,058.0
+ Non-current debt
2,691,263.4
2,810,299.0
– Cash – Cash
3,433,452.0
2,420,110.0
(739,506.6)
425,247.0
0.0
0.0
+ Ending Shareholders’ Equity
6,940,592.7
5,806,039.6
= Total Net Capital
6,201,086.1
6,231,286.5
Trade receivables receivables + Inventories + Other current assets – Trade – Trade payables – Other – Other current liabilities = Ending Net Working Capital + Ending Net Non-Current Assets
Non-current tangible tangible assets
– Minority – Minority interest
Ending Net Debt
Current debt
= Ending Net Debt + Ending Preference Shares
Source: Own Estimates
Appendix Appe ndix 10 – I mpac mpactt of adjustments adjustments on leve lever age of H & M Leverage
Net debt-to-equity debt-to-equity ratio prior to adjustments adjustments Net debt-to-equity debt-to-equity ratio after adjustments adjustments
2010
2009
-37.2% 54.7%
-45.3% 64.9%
Source: Own Estimates
25
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 11 – Key Key fin anc ancial ial r atios co compa mpari ri son H & M and In dite ditex x Traditional decomposition of ROE
Year Net profit margin margin (ROS) × Asset turnover = Return on assets (ROA) × Financial leverage = Return on equity (ROE)
Alternative decomposition of ROE
Year
H&M
Inditex
2010
2009
2010
2009
20.4%
19.2%
18.3%
16.2%
0.95
0.93
0.95
0.95
19.3%
17.9%
17.4%
15.3%
2.40
2.49
1.89
2.01
46.5%
44.5%
32.9%
30.9%
H&M
Inditex
2010
2009
2010
2009
21.2%
19.9%
18.6%
16.6%
1.47
1.41
2.02
1.78
= Operating ROA (1)
31.2%
28.0%
37.5%
29.6%
Spread
27.9%
25.3%
42.9%
17.6%
0.55
0.65
-0.11
0.07
= Financial leverage gain (2)
15.3%
16.5%
-4.6%
1.3%
ROE = 1 + 2
46.5%
44.5%
32.9%
30.9%
Net operating profit profit margin × Net operating asset turnover
× Net financial leverage
Common-sized income statement
H&M
Inditex
Year
2010
2009
2010
2009
Sales
100.0%
100.0%
100.0%
100.0%
Cost of materials
-37.1%
-38.4%
-40.7%
-42.9%
Personnel expense
-13.1%
-13.4%
-16.0%
-16.2%
-9.8%
-9.8%
-8.7%
-9.3%
-11.7%
-11.6%
-9.4%
-9.3%
Net interest expense/incom expense/incomee
-1.1%
-1.0%
-0.4%
-0.6%
Tax expense
-6.9%
-6.7%
-6.5%
-5.5%
0.0%
0.0%
0.0%
0.0%
20.4%
19.2%
18.3%
16.2%
Depreciation and amortization Other operating expense
Profit from discontinued operations Net profit
Key profitability ratios
Year
H&M
Inditex
2010
2009
2010
2009
EBITDA margin
38.2%
36.6%
33.9%
31.7%
NOPAT margin margin
21.2%
19.9%
18.6%
16.6%
Net profit margin margin
20.4%
19.2%
18.3%
16.2%
Asset management ratios
Year
H&M
2010
Inditex
2009
2010
2009
26
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Operating working capital/Sales
2.1%
2.9%
-7.2%
-6.7%
Net non-current non-current assets/Sales assets/Sales
65.9%
68.1%
56.7%
63.0%
PP&E/Sales PP&E/Sales
65.2%
68.0%
53.6%
60.0%
48.71
34.19
-13.87
-14.85
Net non-current non-current asset turnover turnover
1.52
1.47
1.76
1.59
PP&E turnover
1.53
1.47
1.86
1.67
23.65
26.57
26.00
26.28
Days’ receivables
15.2
13.5
13.8
13.7
Inventories turnover
3.50
3.80
4.20
4.79
Days’ inventories
102.8
94.7
85.7
75.1
Trade payables turnover
10.14
10.61
2.08
2.26
35.5
33.9
173.4
159.2
Operating working capital turnover
Trade receivables receivables turnover
Days’ payables
Debt, coverage and liquidity ratios
Year
H&M
Inditex
2010
2009
2010
2009
Current ratio
2.96
3.25
1.94
1.71
Quick ratio
2.13
2.33
1.49
1.28
Cash ratio
1.80
1.99
1.28
1.05
Operating cash flow ratio
1.58
1.62
0.96
1.01
Liabilities-to-equity Liabilities-to-equity
1.40
1.49
0.89
1.01
Debt-to-equity
1.07
1.15
0.39
0.49
Net debt-to-equity debt-to-equity
0.55
0.65
-0.11
0.07
0.445
0.464
0.20
0.24
0.35
0.39
-0.12
0.07
Interest coverage (earnings based)
26.46
26.44
58.65
36.20
Interest coverage (cash flow based)
25.13
23.54
64.46
45.61
Debt-to-capital Debt-to-capital Net debt-to-net debt-to-net capital
Key profitability ratios
H&M
Inditex
Year
2010
2009
2010
2009
ROE
46.5%
44.5%
32.9%
30.9%
Dividend payout ratio
59.8%
66.0%
32.9%
37.0%
Sustainable growth rate
18.7%
15.1%
22.1%
19.4%
Source: Own Estimates
27
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 12 – H & M sale ales s growth dri ve vers rs
Table 1: Trailing twelve months growth rates Region
Shops
Sales per shop
Sales
Germany
2%
-5%
-2.8%
Nordics
1%
-5%
-3.5%
Rest of Europe
5%
-5%
0.3%
Asia
39%
-14%
20.3%
Americas
5%
-1%
3.5%
Franchise
22%
-1%
20.4%
Global
5%
-5%
0.4%
Shops
Sales per shop
Sales
Germany
386
64.83
25,024
Nordics
404
40.66
16,425
1,100
44.46
48,905
Asia
99
61.88
6,127
Americas
275
41.15
11,317
Franchise
61
17.75
1,083
2,325
46.83
108,880
Table 2: Trailing twelve months actual sales (SEK m) Region
Rest of Europe
Global
Source: H&M Hennes & Mauritz AB reports
Appendix Appe ndix 13 – H & M sale ales s f orec orecas asts ts Measure
2011
2012
2013
2014
Terminal
Number of shops shops
2,325
2,461
2,618
2,806
3,008
Yoy Growth
5.4%
5.8%
6.4%
7.2%
7.2%
109,075
111,888
115,348
117,886
120,475
0.4%
2.6%
3.1%
2.2%
2.2%
Sales
Yoy Growth
Source: Own Estimates
28
Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB orecasted ted condense condensed d F in ancial Sta Stateme tements nts Appendix Appe ndix 14 – F orecas
SEK (m)
2011
2012
2013
2014
Term
Balance Sheet
2,235
2,293
2,364
2,416
2,470
Net Working Capital Capital
71,713
73,578
75,859
77,528
79,233
+ Net NC Assets
73,948
75,871
78,223
79,944
81,703
= Net Assets
26,159
26,839
27,671
28,280
28,902
Net Debt
47,789
49,032
50,552
51,664
52,801
+ SH Equity
73,948
75,871
78,223
79,944
81,703
= Net Capital
2,235
2,293
2,364
2,416
2,470
108,884
111,715
115,179
117,712
120,302
22,321
22,951
24,523
25,062
25,614
1,168
1,225
1,290
1,347
1,377
21,154
21,726
23,232
23,715
24,237
2011
2012
2013
2014
Term
Operating ROA
30.2%
30.2%
31.3%
31.3%
31.3%
ROE
44.3%
44.3%
46.0%
45.9%
45.9%
BV of Assets Growth Rate
0.4%
2.6%
3.1%
2.2%
2.2%
BV of Equity GR Rate
0.4%
2.6%
3.1%
2.2%
2.2%
1.5
1.5
1.5
1.5
1.5
2011
2012
2013
2014
Term
21,154
21,726
23,232
23,715
24,237
(8)
(58)
(71)
(52)
(53)
(264)
(1,865)
(2,281)
(1,669)
(1,706)
96
680
832
609
622
Free cash flow to equity
20,978
20,484
21,712
22,603
23,100
NOPAT
22,321
22,951
24,523
25,062
25,614
(8)
(58)
(71)
(52)
(53)
- ∆ net non-current assets
(264)
(1,865)
(2,281)
(1,669)
(1,706)
Free cash flow to capital
22,049
21,028
22,171
23,341
23,855
Income Statement
Sales NOPAT - Net interest expense after tax = Net Profit
Operating ROA
Net Operating Asset Turnover Turnover
Cash Flow
Net profit - ∆ net working capital - ∆ net non-current assets + ∆ net debt
- ∆ net working capital
Source: Own Estimates
Appendix Appe ndix 15 – Beta Calculati on
In order to determine H&M’s cost of capital, we have first determined the equity beta’s of H&M H &M and two of its main competitors, Inditex and Marks & Spencer, by regressing (for three and five years) their monthly returns against the returns on the MSCI Europe Index. After obtaining the
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB equity betas, we have calculated the asset beta’s (we assume a debt beta of zero which seems plausible given the fact H&M hardly used debt financing signalling superior creditworthiness). By taking the average asset beta of the three companies, we calculated again the equity beta for H&M. Depending on both the time horizon chosen and the index used (we used both MSCI Europe and Vanguard) we obtained a maximum equity beta of 0.34 for H&M.
Appendix Appe ndix 16 – WACC calculati calculati on
Risk free rate is equal to 2.78%. This risk-free rate is based on the yield of ten-year Swedish government bonds between April 2010 and October 2011. We have taken an average of the rates that were observed each month between April 2010 and October 2011. Source: Sveriges Risk Bank, http://www.riksbank.com/ The equity beta obtained for H&M was calculated by using the average equity betas of FT (0.55), Reuters (0.56) and Thomson One Banker (0.53). This gave us an equity beta of: (0.56+0.55+0.53)/3 (0.56+0.55+0.53)/3 = 0.55. Market risk premium is equal e qual to the historical risk premium of 5.5% Costs of equity = risk free rate + Beta * (market risk premium) = 2.78% + 0.55*(5.5) = 5.79%. The cost of debt is assumed to be equal to 2.7% as explained earlier in footnote 4 of the accounting analysis. WACC is calculated using the formula below:
Net debt equals: 34,229.70 SEK m. For equity, equit y, we have taken the market value of equity. This was calculated by multiplying the number of shares outstanding at November 30th, 2010 * share price at November 30th, 2010. This gives us a market value of: (1,655,072,000 * 237,40 SEK) / 1,000,000 = 392,914.09 SEK m. The after tax costs of debt are equal to 2.7% * (1-0,253) = 2.02%. Net debt / Net debt + Equity = (34,229.70) / (392,914.09 + 34,229.70) = 0.065. Equity / Net debt + Equity = 1 – 1 – 0.065 0.065 = 0.925 Plugging in all values in the formula gives a WACC of: (0.07 * 2.02) + (0.92*5.79) = 5.48%
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix Appe ndix 17 - Estimates Estimates of of Valu e of of Equi ty
Table 3: Total Equity Value (SEK m) Valuation Method
Beginning book value
Capitalized NP2010
Value between 2010 and 2014
Terminal value
Total Value
Abnormal earnings
47,613.10
-
84,186.91
456,458.54
588,258.55
Free Cash Flow to equity
-
-
91,951.23
496,307.33
588,258.55
Abnormal earnings growth
-
365,348.79
43,378.87
179,530.89
588,258.55
Source: Own Estimates
Appendix 18 - Estimated of of Share Pri ce be beyond yond Termi nal Ye Year ar u nder th e two Sce Scenar ios
AE > 0 beyond terminal year Total Value SEK 588,258.55 m
Price per share SEK 355.43
AE = 0 beyond terminal year Total Value SEK 131,800.01 m
Price per share SEK 79.63
Source: Own Estimates
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Financial Analysis Report – Report – H&M H&M Hennes & Mauritz AB Appendix 19 – Se Sensiti vity anal ys ysii s Share Price Sensitivity h t w o r e G t l a a n R i m r e T
Cost of Equity 3.70% 3.20% 2.70% 2.20% 1.70% 1.20% 0.70%
5.29% 735.85 576.78
5.79% 560.32 465.65
6.29% 452.55 390.48
6.79% 379.65 336.25
7.29% 327.06 295.27
7.79% 287.31 263.22
8.29% 256.22 237.46
479.13 413.08 365.43 329.43 301.28
401.62 355.43 320.53 293.23 271.30
345.70 311.87 285.41 264.15 246.69
303.45 277.81 257.20 240.27 226.13
270.41 250.43 234.03 220.32 208.69
243.86 227.96 214.67 203.40 193.72
222.06 209.18 198.26 188.87 180.73
Figure 3: Share price sensitivity to the cost of equity and the terminal growth rate Source: Own Estimates
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