RBC downgrades Zara owner Inditex, upgrades H&M

Investing.com - RBC Capital Markets has taken a fresh look at the retail fashion sector in Europe, and decided to upgrade its investment stance on H&M, while downgrading Inditex (BME:ITX).

H&M Hennes&Mauritz (ST:HMb) has seen a recent improvement in trends, primarily driven by womens and kidswear, the bank said, and is stepping up investment in existing stores (with around 250 stores globally this year are being refurbished) to provide a better in store experience for customers.

“We see further gross margin upside for H&M driven by a more favorable buying environment and inventory control, foreign exchange, lower raw material costs and freight rises being less than feared,” the bank said, in a note dated May 17.

The bank has lifted its FY24-25 EPS forecasts by 1%-2% owing to slightly higher sales and gross margin estimates, and its price target moves up from SEK190 to SEK200. 

With this in mind, RBC has upgraded its stance on H&M to ‘outperform’ from ‘sector perform’.

At 04:45 ET (08:45 GMT), H&M stock rose 2.5% to SEK179.60, having gained only just over 1% so far this year.

Inditex's differentiated business model has helped it to deliver strong outperformance during and after the pandemic, RBC noted, but as a result its stock has gained 10% year to date and almost 40% over the course of the last year.

“We now expect trends gradually to normalise, thus providing less scope for upside surprises, and we have more valuation upside for some other retail stocks,” the bank added.

Thus, RBC has downgraded its rating on the Zara owner to ‘sector perform’ from ‘outperform’, keeping its target price at E47.

At 04:45 ET (08:45 GMT), Inditex stock rose 0.3% to E43.46.