By Scott Kanowsky
Investing.com -- Shares in H & M Hennes & Mauritz AB (ST:HMb) gained more than 3% on Monday after analysts at Bank of America upgraded their rating of the clothing retailer and projected a potential recovery in earnings.
In a note to clients, the analysts bumped up their rating of the Swedish company to buy from underperform, adding that the group's profit will rebound faster and more strongly than the market expects. They argued that an eventual fall in input costs and weakening foreign exchange headwinds, along with H&M's SEK 2 billion ($1 = SEK 10.48) savings plan, will help support the revival.
Bank of America's price target for H&M was also raised to SEK 165 from SEK 90.
“The H&M buy-thesis is a margin rebound story over [the second half of 2023] and FY2024 we think the market does not yet see or believe in,” the analysts wrote.
Last month, H&M posted lower-than-expected fourth-quarter profit, which Chief Executive Officer Helena Helmersson said was caused by a spike in raw material and freight expenses, as well as a stronger U.S. dollar that resulted in "extensive" increases in the cost of goods purchases.
Despite these pressures, the group's sales grew by 5% in local currencies in the current trading period up to January 25. Excluding Russia, Belarus, and Ukraine - where H&M shuttered its operations following the outbreak of war in 2022 - sales increased by 9%. H&M will release its top-line figures for the December to February period next month.
Helmersson described the external trading environment as "challenging, but moving in the right direction," saying the company expects to post higher sales and margins in 2023. H&M also backed its guidance of double-digit operating margin in its 2024 financial year.
In January, analysts at Jefferies argued that the disappointing quarterly bottom-line returns meant that the firm's optimism over current trading "will likely be lost" within consensus downgrades.