Photographer: Chris Ratcliffe

A $140 Billion Asset Manager Bets on H&M Rebound as Others Flee

  • Harris Associates raises stake, sees ‘substantial upside’
  • H&M has been taking right steps to fix issues, investor says

As other investors head for the exit, a manager overseeing $140 billion in assets is betting on a turnaround in Hennes & Mauritz AB.

Harris Associates LP increased its stake in H&M fourfold last year and currently holds more than 5 percent of the Swedish fashion retailer’s shares, Justin Hance, portfolio manager and director of international research at the Chicago-based asset manager, told Bloomberg on Monday. Much of that position was built in the second half of 2017, when H&M’s stock price plunged, he said.

The firm places bets based on a stock’s “underlying intrinsic value” four to five years down the road, Hance said. “When we look at H&M from that time horizon, we think there’s substantial upside in the shares.”

The Swedish purveyor of cheap-and-chic fashion, whose biggest shareholder is the billionaire Persson family that started the company in 1947, dropped more than 30 percent last year. H&M has lost about 7 percent so far this year and is now trading at the lowest levels since March 2009.

H&M sales growth slumped last year as shoppers increasingly turned to online marketplaces such as Zalando SE for new gear. The company struggled to reduce excess inventory and was forced to sell some of its wares at steep discounts, resulting in a record drop in quarterly sales in the fourth quarter.

Sales Slump

The decline in H&M sales in the fourth quarter was the steepest on record

Source: H&M

“There is no doubt that there are some issues, such as weak sales in physical stores," Hance said. "But when I think about the valuation lost in the share price, I think that it’s significantly disproportionate to the impact on the business."

H&M has already taken steps to fix those issues by slowing its physical store expansion in mature markets, speeding up lead times, investing heavily in e-commerce and extending collaborations with online platforms such as Alibaba Group Holding Ltd.’s ’s Tmall in China.

"There are a lot of actions being taken, and given what we see from the company, we believe the shares are undervalued," Hance said. Harris Associates has also noted the scale of share purchases by people high up in the organization. “We would like to emphasize that we believe it is positive that the chairman bought more than $1 billion worth of stock in 2017.”

Investors will get a better sense of what H&M is doing when it holds its first capital markets day on Feb. 14.

"They are taking a lot of the right steps, perhaps if you go back a few years they didn’t move quite as fast as they should have, but I think from where we are today, a lot is changing for the better and I think the CMD will be a good chance for them to highlight in more detail what actions they are taking," Hance said.

Other investors are less sanguine. Swedish savings and insurance giant Skandia’s actively managed funds have spent the past months selling off most of its stake in the company. As for analysts, they’re more downbeat on H&M’s prospects than at any time in at least 15 years.

Lower Expectations

The average analyst H&M price target has dropped to the lowest level since 2009

Source: Data compiled by Bloomberg

Of those analysts who provide H&M ratings data to Bloomberg, 51 percent are now advising clients to sell the shares. That’s the most negative overall view since at least early 2003, according to Bloomberg data. The average 12-month analyst price target has dropped to the lowest since early 2009.

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