That's right: Although many in the U.S., especially on the West Coast, may just be getting their first taste of H&M (OTC: HMRZF.PK), this global operation has been around since 1947. Hennes & Mauritz (Swedish for "hers and his"), was founded in Sweden by Erling Persson, who was impressed with some of the U.S. department stores back in the mid-40s. Today you can find H&M in 22 countries -- now that's global!
Last weekend, after feeling eerie in one of the many desolate Gap
"Fashion and quality at the best price"
This quote from their 2005 annual report speaks to a strategy that has been extremely successful for a number of retailers. Target's
Like Target, who has worked with designers such as Michael Graves and Isaac Mizrahi, H&M has collaborated with Stella McCartney -- and, more recently, Viktor & Rolf -- to put out signature releases. Working with these renowned designers has given fashion street cred to both retailers, as it has allowed us regular Joes the chance to buy what people normally have to pony up thousands of dollars to own. And the low prices that customers pay for this trendy gear means that when it goes out of style two weeks later they can feel OK about tossing it to the side and heading right back to H&M for the fresher styles.
Of course, shopping cheap-chic isn't only for those of us that can't afford actual-chic anymore. Fans of H&M's styles include Gwen Stefani, Shakira, Kanye West, and the Olsen twins. While H&M's paid spokesmodel, Madonna, is a great choice for such a global brand, free endorsements from names like these can do wonders for any retailer in the U.S. market.
It's perfectly logistical
The fact that people seem to like H&M's clothes -- I read that a week after a store opened in Pasadena there was still a 40-minute wait to get into a new H&M store -- is all well and good, but I tend to be fairly skeptical on the finicky matters of fashion. That's why H&M's business strategy resonated with me. Rather than be totally dependent on guessing what new fashions are going to stick, H&M leverages the distribution platform they have built to strike a balance between price and delivery time. For newer fashions or very seasonal apparel, the focus is on getting it into stores as quickly as possible, while staple garments -- think men's collared shirts in cornflower blue -- can be put on the slow ship to cut down on cost.
How important is this? Witness what happened to fancy jeans maker True Religion Apparel
Where's your headroom at?
When it comes to going after the price-conscious fashion shopper, H&M isn't alone by a long shot. In addition to Target, other department stores and discounters have gotten the hint -- Wal-Mart has launched a new upscale line called "Metro7" and I've seen a handful of Sears
In terms of growth prospects, though, the difference between H&M and other global retailers like Gap is that when Gap says "global," they mean the U.S., Canada, the UK, France, and Japan. Meanwhile, H&M has been in Germany, their largest market by far, for nearly as long as Gap has been in existence (side note: Gap retreated from Germany in 2004 after opening only ten stores). Since 2003 alone they have entered eight new countries, including Ireland and Hungary in 2005. Most remarkable, though, is that as established as the brand is, H&M has fewer than 100 stores in the U.S. compared to thousands of stores for Gap, and they are now preparing to enter the Asian market through Shanghai and Hong Kong in 2007. They also have not yet expanded their catalog and Internet sales outside of the Nordic countries.
H&M is currently trading at $44.55 for U.S. investors, or 26.1 times its trailing-twelve-months EPS. I estimate that it will probably earn somewhere around $1.78 per share for the 2006 fiscal year, which would put the company's current price at 25 times '06 earnings. This certainly puts it at the pricier end of a few of the comparable companies that I looked at, but it was well above those same competitors in terms of gross margin, operating margin, and return on equity. Who knows? Maybe it's worth paying up to have less exposure to the heavily indebted American consumer.
In any case, I think H&M represents a really great retail prospect that many U.S. investors may overlook. It could definitely be worth a peek at the current price, but if it happens to fall under $40, it may be a nice buy. Of course, H&M is not by any means the only great opportunity outside of the U.S. -- and if I've whet your appetite for some stylin' overseas stocks, you may want to check out the Fool's newest newsletter, Motley Fool Global Gains. Click here for a free trial.
For related Foolishness:
- Looking for the World's Best Stocks?
- It's Time to Go Global
- Think Like a Woman
- Gap: Gone in 30 Seconds
Clad in his H&M tweed jacket, Fool contributor Matt Koppenheffer wrote this article with visions of couture dancing in his head. He owns shares of both True Religion (ouch!) and Sears Holdings. The Fool's disclosure policy is never cheap, but always a great value.