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

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Figure 4 – Unemployment Rate G7 Economies, %

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Source: IMF (2014)

Figure 5 – Interbrand Ranking for H&M, 2013

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Source: Interbrand (2014)

The financial performance of H&M in terms of growth was positive in the context of the challenging economic environment. When reviewed in terms of different financial ratios, it will be seen that there is some deterioration in selected financial metrics of H&M although in general, most of the figures have remained flat versus the prior year. This is seen in table 1 which shows the selected metrics. Overall, the financial position of H&M is strong particularly as H&M has not relied extensively on debt to finance its operations. The company has very little debt and has funded the business largely through equity. This has resulted in favourable liquidity ratios (i.e. high current ratio, high quick ratio) and minimal gearing (i.e. low debt ratio, very high times interest earned). Despite the high equity funding of the company, it has still been able to achieve high return on equity figures with 2011 and 2012 return in equity values at 35.9% and 38.5%, respectively. The financial metrics are based on the financial statements of the company which are included in appendices C to E.

Table 1 – Selected Financial Metrics for H&M

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The financial position of H&M is strong based on the financial metrics shown in table 1. Most metrics remain stable with only a few metrics showing a deterioration versus the prior year but not enough to cause concern. A key challenge for the company is the ability to continue its growth and expansion while relying on equity funding as the company is not able to take advantage of any tax benefits (i.e. tax shields) given the very low debt levels of the company. This may mean that the company is not optimising its funding even if it is achieving high return on equity figures.

Another risk of H&M is the heavy reliance on the developed markets for its business which limits the growth of the company given the low economic growth rates in the developed countries. H&M has relatively minimal exposure to higher growth, emerging market countries with the contribution from these countries still relatively small. Nevertheless, the European Union and the US markets remain as key markets for clothing (WTO, 2014). A summary of the strengths and weaknesses of H&M is given in table 2.

Table 2 – H&M Strengths and Weaknesses

Strengths

Weaknesses

Very strong brand globally

Reliance on developed markets

Sound financial position, minimal debt level

Minimal presence in growth markets (i.e. emerging markets)

Franchise resilient to economic challenges

Unable to use tax benefits

H&M is addressing some of its weaknesses with its investments in some emerging markets. In the coming years, H&M expects to increase investments in China and Russia (H&M, 2014D), two large emerging market countries. This is complemented by growth in developed markets with the US still a key market for growth for H&M (H&M, 2014D).

3. Conclusion and Recommendations

The major issues for H&M relate to the growth opportunities for the company. H&M has been able to continue to grow its revenues even in the context of the difficult macroeconomic environment. However, growth levels could be higher if further investments were made and focused on emerging markets instead of the developed markets. As it is the growth of H&M is limited by the minimal growth shown economically by the developed countries which have not been immune to high unemployment rates in recent years. Another issue for the company which is a result of its preferred funding policy is the lack of use of tax benefits as the company's very low level of debt minimising any potential benefits that could be brought to the company with the use of tax shields.

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The recommendations for H&M are the following:

- Consider a heavier skew of investment in emerging markets to support the growth of the company

- Take on more debt to optimise the funding and enhance the returns of the company

- Leverage the brand and take greater risks in its strategic actions

The recommendations can lead to higher growth and enhanced returns for the company.

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REFERENCES

Datamonitor (2013) “H&M Company Briefing”, [Online] Available from http://www.datamonitor.com/store/Product/hm_verdict_company_briefing?productid=CM00206-005 [Accessed on 9 March 2014]

Google Finance (2014) “H & M Hennes & Mauritz AB”, [Online] Available from http://www.google.com/finance?q=STO%3AHM-B&ei=98cgU8ivEuatwAOp3QE [Accessed on 6 March 2014]

H&M (2014A) “Our History”, [Online] Available from http://about.hm.com/en/About/facts-about-hm/people-and-history/history.html [Accessed on 7 March 2014]

H&M (2014B) “Business Concept”, [Online] Available from http://about.hm.com/en/About/facts-about-hm/about-hm/business-concept.html#cm-menu [Accessed on 8 March 2014]

H&M (2014C) “Facts About H&M”, [Online] Available from http://about.hm.com/en/About/facts-about-hm.html [Accessed on 8 March 2014]

H&M (2014D) “Expansion strategy”, [Online] Available from http://about.hm.com/en/About/facts-about-hm/about-hm/expansion-strategy.html#cm-menu [Accessed on 8 March 2014]

H&M (2013A) “Annual Report 2012”, [Online] Available from http://about.hm.com/content/dam/hm/about/documents/en/Annual%20Report/Annual-Report-2012_en.pdf?bcsi_scan_14d22e62fad62687=0&bcsi_scan_filename=Annual-Report-2012_en.pdf