Analyst Report: H&M Hennes & Mauritz AB 9 December 2011 Rotterdam School of Management, Erasmus University BKM04ACA-11 Financial Analysis Prof. Dr. Erik Peek Written by: Joppe Out Marcel Du Ry Ivan Fartunov Di Piao 349810 322596 348250 350056 Financial Analysis Report – H&M Hennes & Mauritz AB Contents Introduction..................................................................................................................................... 3 Strategy Analysis ............................................................................................................................. 3 Accounting Analysis ........................................................................................................................ 5 Financial Analysis .......................................................................................................................... 7 Prospective Analysis ....................................................................................................................... 9 Concluding Remarks ..................................................................................................................... 12 References: .................................................................................................................................... 13 Appendix ....................................................................................................................................... 14 Appendix 1 – H&M five year overview of key figures .............................................................. 14 Appendix 2 – Market share and geographic sales distribution of H&M in 2009 and 2010..... 14 Appendix 3 – Fashion triangle .................................................................................................. 15 Appendix 4– H&M unadjusted standardized financial statements .......................................... 15 Appendix 5 – H&M Reported future rental commitments ........................................................ 17 Appendix 6 – H&M detailed future rental payments schedule ................................................. 18 Appendix 7 - Adjustments to H&M’s financial statements ....................................................... 19 Appendix 8 – Adjusted financial statements H&M ................................................................... 20 Appendix 9 – Adjusted standardized financial statements Inditex............................................ 23 Appendix 10 – Impact of adjustments on leverage of H&M ..................................................... 25 Appendix 11 – Key financial ratios comparison H&M and Inditex ......................................... 26 Appendix 12 – H&M sales growth drivers ............................................................................... 28 Appendix 13 – H&M sales forecasts ......................................................................................... 28 Appendix 14 – Forecasted condensed Financial Statements .................................................... 29 Appendix 15 – WACC calculations (1) ..................................................................................... 29 Appendix 16 – WACC calculations (2) ..................................................................................... 30 Appendix 17 - Estimates of Value of Equity.............................................................................. 31 Appendix 18 - Estimated of Share Price beyond Terminal Year under two Scenarios ............ 31 Appendix 19 – Sensitivity analysis ............................................................................................ 32 2 Financial Analysis Report – H&M Hennes & Mauritz AB Introduction H&M is a one of the leading global fashion retailers. The company started in Sweden more than 60 years ago and is nowadays present in more than 38 countries with over 2200 stores. Despite its global presence, H&M is relatively concentrated in the more mature Nordic and German markets where 40% of sales are coming from. In 2010, the company possessed a 0.9% share of the worldwide market for apparel retail (RSP value)1 (Appendix 2). H&M´s turnover in 2010 was SEK 108,483 million. A five-year overview of the company is presented in Appendix 1. Strategy analysis The business concept of H&M centres on providing “fashion and quality at the best price”. The company offers fashion products to a broad target group consisting of women, men, teenagers and children. One of H&M´s differentiating factors is its cooperation with famous designers like Karl Lagerfeld and Viktor & Rolf to come up with fashionable new collections that generate a lot of attention in the fashion scene. H&M sells its products via retail, catalogue and internet sales and since 2006 on a franchise basis. Rather than owning its stores, the company makes use of lease arrangements. The company has an own design and buying department which creates the collections centrally. Via the concept of regional grouping – a concept in which products are purchased and distributed to a group of regional (sales) countries – products are allocated to the sales countries based on observed demand in each market. H&M buys it goods from about 700 independent suppliers, located in four different continents.2,3 Since a couple of years, the company makes use of a new format, Collection of Style (COS), a higher priced concept aiming to attract the ´older´ customer. Also, the company plans to start internet sales in the USA by the end of 2011/beginning of 2012.4 The global apparel retail market had a RSP value of 1,527 billion USD. 5 Since 2006, it grew at CAGR of 3.9% with the mature markets (Western Europe and North America) growing by only 0.4% annually. While the global growth is expected to slow down in the next 5 years, emerging markets are still going to account for most of it. 1 2 Passport database (2010) JP Morgan (2010) 3 DataMonitor (2011) 4 H&M Hennes & Mauritz AB (2010) 5 Passport database (2010) 3 Financial Analysis Report – H&M Hennes & Mauritz AB The bargaining power of buyers is low to moderate. Virtually all H&M clients are individual consumers which gives them very little bargaining power. The low switching costs faced by customers in the industry and the ever increasing availability of information balance this to a certain degree, giving consumers some power. Suppliers bargaining power is low due to H&M’s wide range of suppliers. Furthermore, the switching costs for the company are rather low. The low capital requirements of the industry and the lack of switching costs for the customers make the market lucrative for new entrants. H&M’s large network provides the company with a wide base for improving efficiency and building brand equity, which decreases the threat of new entrants. An industry-wide increase in advertising expenses indicates intensifying rivalry among existing firms. Currently, the only feasible substitute of retail clothing is the online sales medium. H&M, as well as other retailers, are progressively moving into that space, which we consider of being solely part of the evolving market rather than a real substitute. Recent market developments and future trends Internet – apparel retail will continue to be strongly impacted by the internet. Going hand in hand with online retail, the use of multi-channel platforms represents an important trend. Internet and multi-channel sales are expected to account for most of the future growth. Because of that, it is unlikely that there will be significant a increase of retail floor space in the mature markets in the near future. Internationalization – thanks to the globalization, fashion around the world becomes more homogeneous than ever making international expansion easier. The major growth potential of the global market is centred on developing markets. Particularly interesting are the cases of Russia and China growing 10.2% and 8.8% respectively (for the period 2010-2013)6. H&M is present in both of the fore mentioned markets but in Russia, it lags significantly behind Inditex which we identified as key competitor due to the similar size and internationalization profile. Competitive strategy Whereas H&M started with a cost-leadership strategy, the company seems to more and more undergo a transition towards differentiation (an example of this is the recent introduction of the higher-end fashion line COS). In terms of brand portfolio, H&M has diversified its portfolio in the last years by acquiring the fashion group FaBric Scandinavian AB in 2008. However, compared to the multi-brand strategy of Inditex, H&M still seems to rely heavily on its consolidated brand. 6 JP Morgan (2010) 4 Financial Analysis Report – H&M Hennes & Mauritz AB H&M’s target is to increase number of shops by 10-15% annually while maintaining profitability levels. The principle for expansion followed by the company is that every store shall have the best commercial location.7 Although H&M has expanded globally, its most vital market is still Europe. For its 2011 expansion strategy, the company has identified China, the USA and the UK as its most important markets. The management recognizes the increasing importance of the Asia-Pacific region (entered in 2007 for the first time) while 2011, in addition to substantial investments in China, the company entered Singapore. In 2012, new franchise entries are planned for Indonesia and Thailand, which would be the first franchise outside the Middle East. Another key development expected in 2012 is the launch of the online shop in the USA – the largest online shopping market.8 One of H&M’s strategic advantages is the short lead-times it maintains through a flexible-value chain sourced from over 700 suppliers mainly in Turkey and China. It distinguishes the company from its highly vertically-integrated main competitor Inditex. H&M’s higher speed to market is very important for the fashion triangle format (Appendix 3) that the company has adopted. Accounting Analysis In order to identify the key accounting policies, we investigated the company’s financial statements and its respective notes. With respect to its business model, our analysis retrieved that H&M’s main accounting policies are most closely related to inventories, non-current tangible assets, and leased assets. Key accounting policies On basis of the current IFRS, management has certain freedom to influence reported inventories. Classically, an overstatement of this working capital position could increase gross profits as well as net income. For H&M, the recent increase in the company’s inventories raises concerns among analysts. Because of that, management might have rather an incentive to understate this post. However, this is offset by the fact that understatement would be associated with higher depreciation and a decrease in profitability. Since we consider that this lies out of the scope of management’s objectives, we believe that there is no motivation for misreporting inventories. The non-current tangible assets of the company are subject to depreciation. Due to IFRS, the determination of the useful life of an asset (and consequently the respective depreciation 7 8 JP Morgan (2010) H&M Hennes & Mauritz AB (2011) 5 Financial Analysis Report – H&M Hennes & Mauritz AB rate/method) allows for a certain range of subjective estimation. In the case of H&M, we found the reported depreciation expenses as percentage of non-current tangible assets to be in line with the same measure of its identified closest industry peer Inditex. Hence, we consider that no adjustments concerning the depreciation are necessary. Leased assets can be either classified as operational leases or financial leases. Though the IFRS does provide guidelines with regard to this classification, they still incorporate a certain leeway of possible assumptions that management can make to distinguish between these two lease forms. H&M treats the report of its premise usage as rental agreements which in turn might be regarded as operational lease expenses. By doing so, the company significantly understates its liabilities (Appendix 4). We decided to adjust for that by transforming the respective rental agreements for the years 2009 and 2010 into financial lease positions.9 Adjusting for financial lease position With respect to the asset distribution of H&M in 2010, total tangible fixed assets amounted to 15,469 SEKm or approximately 26.1% of total assets. The striking point is that rental costs for premises (analogically to operating lease contracts for buildings and land) in 2010 amounted to 12,891 SEKm (plus 229 SEKm per year classified as “Related Party Disclosure”) 10. These assets are of major economic importance for H&M but entirely omitted in the balance sheet. It is not obvious why management chose to omit this position and there are no indicators given whether the present accounting data appropriately reflects the business reality of H&M or whether they underlie strategic accounting choices or rigid accounting rules. A hypothetical explanation could be that management attempts to understate leverage since lease assets are booked against lease liabilities. This significant impact on H&M´s leverage (from virtually no leverage to approximately 50% - Appendix 10) may affect the company’s credit ratings which in turn could lead to an increase in its cost of debt. The financial analysis in section three provides a deeper insight into possible motives for management to keep this material position off-balance. Apart from strategic motives or overly rigid account rules, a transformation of these rental agreements into asset positions may increase comparability with industry peers who (e.g. Inditex) opted for its own specific reporting methods and an alternative portfolio of lease arrangements. Certainly, these adjustments would have also to be made for peer statements in order to make a meaningful comparison. 9 H&M Hennes & Mauritz AB (2010) H&M classifies in its financial statements additional leased premises directly obtained from the Persson family. Members of this family include the founder of H&M, the current CEO, and the current director of the supervisory board. Therefore, we regard these positions as assets of H&M. 10 6 Financial Analysis Report – H&M Hennes & Mauritz AB H&M’s distribution of expenses for premises for the years 2008 to 2010 is presented in Appendix 5. H&M additionally incurs variable sales-based rents. We omitted these accrued positions since respective sales are not reported so that a meaningful distribution is not possible. We distributed the related party disclosure expenses equally weighted over all years, assuming that H&M will continue to utilize them (these stores are situated in profitable key locations). Since H&M virtually does not use debt financing at all, we determined the company-specific discount rate of 2.7% through annual interest expenses over provisions for pensions (these represent the only non-current interest-bearing position of H&M). Although this interest rate might at first appear to be low, the fact that the firm has no debt could be interpreted as a signal of superior creditworthiness. The tax rate of 25.3% was given directly within the company’s financial statements. A detailed outline of the adjustments for the years 2009 and 2010 as well as the respective condensed financial statements can be retrieved from Appendices 6 to 9. Financial Analysis Profitablity A ratio analysis and a cash flow analysis were used to assess the performance of H&M and efficiency of the company’s operations and investment policies. For this reason, a time-series comparison of 2009 and 2010 data of the most important ratios together with a cross-sectional comparison with its closest peer Inditex has been performed (Appendix 11). We employ return on equity (ROE) as an indicator to evaluate H&M’s overall profitability, since it captures how well managers are employing the funds invested by the shareholders to generate returns.11 The alternative decomposition of ROE is preferred over the traditional one because it provides a better identification of the key profitability drivers by separating operating and financing activities. Overall ROE for H&M increased from 44.5% (2009) to 46.5% (2010) with an increase in operating ROA as main driver. The identified closest peer Inditex achieved the same growth reaching ROE of 32.9% in 2010 and although Inditex achieved a higher operating ROA, their business suffered from negative financial leverage gains which offset its operating advantage. According to Bloomberg data, the non-adjusted industry average ROE is 17.8% (excluding outliers) and the non-adjusted industry median is 15.4%. This shows that both companies significantly outperform the industry which is an indication of a superior business model. 11 Palepu, Healy, Peek, (2010) 7 Financial Analysis Report – H&M Hennes & Mauritz AB Looking at the financing policy on ROE, a small decrease in leverage has decreased the tax benefits of debt which in turn is partially offset by an increasing spread due to higher operational profitability. Operating Management A slight increase in the NOPAT margin for H&M was observed in 2010. Inditex is still underperforming with regard to H&M but at the same time diminishing the gap through a higher growth. The EBITDA margins exhibit the same trends. To get a better understanding of the performance of H&M, we looked at the common-sized income statements. The improvement in NOPAT was driven mainly by a decrease in cost of materials and personnel expense. The former can be explained by an increase in retail space even in mature markets which H&M could penetrate through lower freight costs and the exploitation of spare capacities. A possible reason for the decrease in personnel expenses is the growing share of online sales while Inditex benefitted from a larger decrease in procurement costs due to a superior cost control policy. Tax and interest expenses for H&M incurred only marginal changes which indicate relatively stable financing conditions. Investment Management A difference between ROA and operating ROA (far larger operating ROA) is driven by asset turnover vs. net operating asset turnover. Because of the nature of the apparel retail business, the company has both, large cash holdings and significant current liabilities (mostly accounts payable and accrued expenses and other classified income). Net operating asset turnover for H&M has increased slightly (1.47) which indicates the higher efficient usage of company’s assets. Here, main competitor Inditex showed a clear advantage in this measure (2.02). Furthermore, its improvement was larger in comparison to H&M. In 2010, H&M experienced a decrease in both, trade receivables turnover and inventories turnover since they seemingly managed to roll these over to the suppliers and evenly decreased their trade payables turnover from 10.61 to 10.14. Nevertheless, the fundamental driver of the large increase in operating working capital turnover is the tax policy adopted by the company (Increase of current tax liabilities by 1865 million SEK in 2010). Operating working capital turnover is negative for Inditex due to significantly lower payable trade turnover. We detected a slight increase in efficiency of non-current assets (almost entirely consisting of PP&E) usage due to the fact that online sales become more prevalent in H&M´s business model. For Inditex the same trend can be observed whose improvement is again slightly larger. 8 Financial Analysis Report – H&M Hennes & Mauritz AB Financial Management H&M´s liquidity ratios deteriorated slightly in 2010. However, the company maintains a comfortable buffer against short-term liquidity risk and outperforms its main competitor Inditex in these fields. In 2010, H&M decreased its financial leverage (post adjustments) by 10% to 55%. Prior to our implemented financial lease adjustment, the company had virtually no leverage (Debt-to-capital 0.4% in 2010) while after accounting for the rental agreements as financial lease liabilities, this dramatically changed (Debt-to-capital 44.5% in 2010). In terms of interest coverage ratios, H&M and its competitor Inditex are both situated in an obviously safe position. Sustainable growth rate To assess the dividend policy implemented by H&M we looked at the sustainable growth rate of the company. A decrease in the dividend payout rate paired with the already mentioned increase in ROE led to a boost in the sustainable growth rate in 2010 to 18.7% which exceeds the 12% CAGR (sales) of H&M over the periods 2006 – 2010. The non-adjusted sustainable growth rate of the company is 12.3% which is in line with the actual achieved performance. This discrepancy might represent another rationale behind the omission of the rental premises from balance sheet items: investors might demand a higher dividend payout. Due to a lower payout rate, Inditex achieved a higher sustainable growth rate despite its lower ROE. Cash flow analysis In 2010, the cash flows from operating activities for H&M grew by 21% signifying a healthy operating state of the company. This gain was partially offset by higher investments in shortterm investments and increased dividends (despite decrease in payout ratio). As a final outcome, the total cash-flow for the year improved compared to 2009 but remained negative. Prospective Analysis General outlook H&M shows a strong historical firm performance. Being the current world leader in specialty retail with strong brand recognition and high growth expectations due to international expansion, H&M managed to establish a solid foundation of producing continuously abnormal returns. Its upscale position in the market has proven its firm stand so that future premium prices could maintain their beneficial influence on profit margins. Going hand in hand with that, the profitable expectations of the online sale segment might contribute to the increasingly efficient usage of the company’s assets and hence, further strengthen operating profits. 9 Financial Analysis Report – H&M Hennes & Mauritz AB H&M’s management was able to react swiftly to environmental developments with strong investments in IT and marketing and a shift in geographical focus towards profitable emerging markets (mainly Russia, China, Turkey, and Israel). A successful replication of H&M’s business model in these regions might offset or even outweigh the negative effects on profit margins due to the aftermath of the crisis within the traditional markets (and segments), Europe and the US. Possible drawbacks are the high input costs due to the current shock in cotton prices and monetary risks due to exchange rate fluctuations. Although the shock in cotton prices might tend to revert back, inflationary input costs could materialize into a long-term effect. Forecast horizon and terminal value assumptions We consider a forecast horizon of 5 years as adequate which leads to the assumption that H&M will finally arrive in 2015 at its steady-state. Although being relatively short, we view this time frame as reasonable due to the following arguments. H&M has clearly outlined its plans for the upcoming periods which, amongst others, comprise the foray into the new market segment of online sales and the increase of its exposure to international markets with focus on emerging economies. We have incorporated these effects into our growth driver predictions while expecting that their beneficial influences are going to settle in a relatively short time frame due to the lack of non-imitability. Since the company has not outlined further expansion plans, we assume that the status in 2015 will maintain perpetually. It is arguable to state that the omission of future shocks in profitability, either in favour (e.g. successfully establishing a competitive position in the underserved high-demand market of plus size apparel in the US) or against H&M (e.g. negative developments of input prices) is not perfectly precise. However, approaching from an earnings-model perspective, we consider it as reasonable to stabilize our forecast by anticipating that these “abnormal” developments may cancel each other out in the long-term (if not simultaneously, then on an accrued basis). Moreover, we expect H&M´s high brand exposure in combination with the company´s economies of scale to persist as a solid shield against competitive forces that will preserve its current leading position on the market. The bottom line of all these arguments leads to our terminal value assumption: H&M´s abnormal earnings growth will endure while the firm´s growth in sales in the terminal year will gradually settle upon the average industry growth of retail apparel (with current competitive earnings level). Prediction of condensed financial statements To predict the condensed financial statements for the years 2011 – 2015 (Appendix 14), we have forecasted the sales growth rate for these years and related all other numbers to sales. H&M acknowledged in their annual report that they plan to increase the number of shops per year with 10 Financial Analysis Report – H&M Hennes & Mauritz AB 10-15%. Therefore, we have identified as sales driver the yearly growth rate in shops (based on observed yearly growth rates in shops between first nine month 2011 and 2010). The sales-pershop ratio has declined slightly over the last two years (Appendix 12). However, since H&M reports internet sales under its sales per shop, we expect that the observed decline in physical sales-per-shop is partly being offset by an increase in the online sales-per-shop. As net effect, we assume that yearly sales growth is driven by the combination of the increase in the yearly growth rate in shops (per region) and the decrease in sales-per-shop (per region). Using the assumption that sales growth driven by new openings contributes on average half a year of sales, we expect that the yearly sales growth rate will increase from 0.4% in 2011 to 3.1% in 2013 (Appendix 13). We expect that the terminal value year assumptions holds and predict that the sales growth rate will slightly decline to the average retail apparel industry growth rate of 2.2% in 2014/15.12 One of the most important drivers that influence our forecasted financial statements concerns H&M’s cost of materials. Overall, we expect that an increase in value chain efficiency would balance the out the inflation pressure on input costs. In the short term however (2011/12), we expect that the recent spike in the price of cotton13 (which accounts for about 40% costs of materials in the apparel industry) will impact the company´s profit margins negatively. With respect to personnel expenses, we foresee a slight decrease over the forecast period and a constant margin thereafter. Firstly, due to the increasing importance of internet sales we expect that, relatively to sales, less personnel is required. Secondly, the fact that H&M is more and more expanding into regions with lower salary levels most likely will lead to a decrease in personnel expenses relative to sales. We expect that the non-current assets to sales ratio and other operating expenses will remain constant. The operating working capital to sales ratio will not be affected by possible increases in days’ receivables and days’ inventories since until now H&M has been able to roll these increases over to its suppliers by increasing days’ payables. Finally in 2009, H&M altered its exchange rate risk hedging strategy increased the level of cash and cash equivalents substantially. The higher level of these fair value assets decreased leverage in 2010. Since we expect that H&M will stick to its level of hedge protection, we assume the net debt to net capital ratio to remain constant in the future. Resulting from these assumptions, the NOPAT margin for H&M will decrease from 21.2% in 2010 to 20.5% in 2011 and 2012 after which it again rises to 21.3% between 2013 and 2015. 12 13 DataMonitor (2011) Index Mundi (2011) 11 Financial Analysis Report – H&M Hennes & Mauritz AB Calculation of WACC Using the procedure described in (Appendix 15), we obtained an equity beta of 0.34 for H&M. Our estimate seemed unreasonably low compared to the betas reported by FT (0.55), Reuters (0.56) and Thomson One Banker (0.53) so that we have chosen to use an equity beta equal to the average of the equity beta’s from FT, Reuters and Thomson One Banker which is 0.55. For the risk-free rate, we employ a value of 2.78% based on the average yield on 10-year Swedish government bonds between April 2010 and October 2011. As a risk premium, we have taken the worldwide historical average of 5.5%.14 Using those values, the traditional CAPM equation yields a cost of equity of 5.79%. For the cost of debt we resorted to the 2.7% mentioned earlier in the report. Using the cost of debt and equity, the net debt and market value of equity levels, we obtain a WACC of 5.48% (Appendix 16). Estimation of H&M´s equity value To estimate the equity value, we have applied three different valuation models: the discounted cash flow model, the abnormal earnings model and the abnormal earnings growth model. We assume the sustainable sales growth rate after the terminal year to remain at 2.2% (in real terms) with a discount rate equal to the firm´s cost of equity of 5.79% which means that we expect H&M to persistently generate competitive abnormal earnings. Looking at the outcomes of the three models, we see that all models arrive at the same equity value of 588,258.55 SEK m (Appendix 17, Appendix 18). Concluding remarks On basis of all three valuation models, we determine an equity value of SEK 355.43 per share which represents an upward potential of 51.6% (based on the price on 30 November 2010). The valuation presented in this report is based on a series of assumptions that are not to be considered 100% accurate. The main reason for the deviation of our estimate from the market is in our view an underestimation of the required rate of return (we consider it to be equal to the cost of equity of H&M). The sensitivity analysis (Appendix 19) indicates that in the vicinity of a reasonable discount rate of 8%15, our valuation would be in agreement with the market price levels during the last year. Another explanation could be an overestimation of the terminal growth rate that we implied in our model. 14 15 Palepu, K.,Healy, P., Peek, E., (2010) JP Morgan (2011) 12 Financial Analysis Report – H&M Hennes & Mauritz AB References: DataMonitor (2011), Global Textiles, Apparel & Luxury Goods Euromonitor (2011), Global Industry Overview: Apparel, Retrieved from: http://www.youtube.com/watch?v=IDyjBEAGybE, Accesed : 21.11.2011 H&M Hennes & Mauritz AB (2011), H&M nine month report 2011 H&M Hennes & Mauritz AB (2010), Annual Rpeort 2010 H&M Hennes & Mauritz AB (2009), Annual Rpeort 2009 H&M Hennes & Mauritz AB (2008), Annual Rpeort 2008 JP Morgan (2011), General Retail H2 outlook 28 September 2011 JP Morgan (2010), European Apparel 28 October 2010 IndexMundi (2011), Retrieved from: http://www.indexmundi.com/commodities/, Accesed : 18.11.2011 Inditex Group (2010), Annual Report 2010 Inditex Group (2009), Annual Report 2009 Passport database (2010), Retrieved from: http://www.portal.euromonitor.com, Accesed : 18.11.2011 Palepu, K.,Healy, P., Peek, E., (2010), Business Analysis and Valuation: IFRS Edition, Second edition, South-Western Cengage Learning 13 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix Appendix 1 – H&M five year overview of key figures 2010 Sales (SEK m) EBITDA (SEK m) ROE % Employees ('000) Number of shops 108,483 27,720 44.1% 59,440 2,206 2009 101,393 24,474 42.2% 53,476 1,988 2008 88,532 22,340 44.3% 53,430 1,738 2007 78,346 20,196 45.4% 47,029 1,522 2006 68,400 16,922 40.2% 40,855 1,345 Source: H&M Hennes & Mauritz AB Annual Report (2010) Appendix 2 – Market share and geographic sales distribution of H&M in 2009 and 2010 Figure 1: Market share of the five biggest Apparel retailers Source: Passport database (2010) Figure 2: H&M Sales by geographic region Source: H&M Hennes & Mauritz AB Annual Reports (2010, 2009) 14 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 3 – Fashion triangle Source: JP Morgan European Apparel 28 October 2010 Appendix 4 – H&M unadjusted standardized financial statements Income statement (SEK m) Sales Cost of materials (nature) Personnel expense (nature) Depreciation and amortization (nature) Other operating income, net of other operating expense Operating profit Investment income Other income, net of other expense Net interest expense (income) Profit before taxes Tax expense Profit after taxes Minority interest Net profit 2010 108,483.0 (65,088.4) (14,216.0) (3,611.0) (908.6) 24,659.0 0.0 0.0 349.0 25,008.0 (6,327.0) 18,681.0 0.0 18,681.0 2009 101,393.0 (62,180.1) (13,576.0) (3,019.0) (973.9) 21,644.0 0.0 0.0 459.0 22,103.0 (5,719.0) 16,384.0 0.0 16,384.0 15 Financial Analysis Report – H&M Hennes & Mauritz AB Balance Sheet (SEK m) ASSETS Non-Current Tangible Assets Non-Current Intangible Assets Deferred Tax Asset Other Non-Current Assets Total non-current assets Trade Receivables Inventories Other Current Assets Cash and Marketable Securities Total current assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares Ordinary Shareholders’ equity Total shareholders’ equity Minority Interest Non-Current Debt Deferred Tax Liability Other Non-Current Liabilities (non interest bearing) Total non-current liabilities Current Debt Trade Payables Other Current Liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES 0.0 44,172.0 44,172.0 0.0 257.0 906.0 0.0 1,163.0 0.0 3,965.0 9,882.0 13,847.0 59,182.0 0.0 40,613.0 40,613.0 0.0 622.0 2,038.0 0.0 2,660.0 0.0 3,667.0 7,423.0 11,090.0 54,363.0 15,469.0 1,198.0 1,065.0 518.0 18,250.0 4,587.0 11,487.0 8,167.0 16,691.0 40,932.0 59,182.0 14,811.0 1,674.0 1,246.0 551.0 18,282.0 3,816.0 10,240.0 3,001.0 19,024.0 36,081.0 54,363.0 2010 2009 16 Financial Analysis Report – H&M Hennes & Mauritz AB Cash flow statement items (SEK m) Profit Before Interest and Tax Taxes Paid Interest Paid Non-Operating Gains (Losses) Non-Current Operating Accruals Net (Inv)/Liquidation of Operating Working Capital Net (Inv)/Liquidation of Operating Non-Current Assets Net Debt (Repayment) or Issuance Dividend (Payments) Net Share (Repurchase) or Issuance Net change in cash and cash equivalents 2010 25,008.0 (5,451.0) 0.0 0.0 3,064.0 (783.0) (10,129.0) 0.0 (13,239.0) 0.0 (1,530.0) 2009 22,103.0 (6,468.0) 0.0 0.0 2,856.0 (518.0) (8,755.0) 0.0 (12,825.0) 0.0 (3,607.0) Source: H&M Hennes & Mauritz AB Annual Report (2010) Appendix 5 – H&M Reported future rental commitments Future rental commitments16 (SEK m) Current commitments Due in one year Due in 2-5 years Due more than 5 years ahead 2010 12,891 (+229) 9,546 (+229) 27,255 (+229 p.a.17) 17,818 (+229 p.a.) 2009 12,249 (+193) 9,383 (+193) 26,416 (+193 p.a) 18,546 (+193 p.a) 2008 9,776 (+156) 8,918 (+156) 26,368 (+156 p.a.) 18,728 (+156 p.a.) Source: H&M Hennes & Mauritz AB Annual Rpeorts (2010,2009,2008) 16 17 Includes adjustment for the properties mentioned in Related Party Disclosure p.a. stands for per annum 17 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 6 – H&M detailed future rental payments schedule18 Rental Agreements 2010 (SEK m) Lease/Rental expense 2010 "Less than one year" "2-5 years'' "2-5 years'' "2-5 years'' "2-5 years'' 'More than 5 years'' 'More than 5 years'' 'More than 5 years'' NPV of the leased asset Rental Agreements 2009 (SEK m) Lease/Rental expense 2009 "Less than one year" "2-5 years'' "2-5 years'' "2-5 years'' "2-5 years'' 'More than 5 years'' 'More than 5 years'' 'More than 5 years'' NPV of the leased asset Rental Agreements 2008 (SEK m) Lease/Rental expense 2008 "Less than one year" "2-5 years'' "2-5 years'' "2-5 years'' "2-5 years'' 'More than 5 years'' 'More than 5 years'' 'More than 5 years'' NPV of the leased asset Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 49,140.0 Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 49,693.5 Payment due 9,932.0 9,074.0 6,748.0 6,748.0 6,748.0 6,748.0 6,748.0 6,748.0 5,388.0 Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 Payment due 13,120.0 9,775.0 7,042.8 7,042.8 7,042.8 7,042.8 7,042.8 7,042.8 4,021.5 50,288.7 Payment due 12,442.0 9,576.0 6,797.0 6,797.0 6,797.0 6,797.0 6,797.0 6,797.0 5,145.0 Source: Own Estimates 18 All numbers include Related Party Disclosures 18 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 7 - Adjustments to H&M’s financial statements Adjustments (SEK m) Balance Sheet Non-current tangible assets Beginning capitalization New leases Annual depreciation Non-current debt Beginning debt New leases Debt repayment Deferred tax liability Shareholders' equity 55,324.3 Income Statement Cost of sales Lease expense Depreciation expense Interest expense Tax expense Net profit Discount rate for both yrs Tax rate for both yrs (13,120.0) 7,001.2 1,512.3 1,165.5 3,441.1 2.70% 25.30% (12,442.0) 6,887.1 1,487.6 1,029.0 3,038.3 2010 Assets 49,693.5 12,632.0 (7,001.2) 49,693.5 12,632.0 (11,607.7) 1,165.5 3,441.1 55,324.3 54,166.6 Liabilities 2009 Assets 9,140.0 11,913.7 (6,887.1) 49,140.0 11,913.7 (10,954.4) 1,029.0 3,038.3 54,166.6 Liabilities Source: Own Estimates 19 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 8 – Adjusted financial statements H&M Income statement (SEK m) Sales Cost of materials (nature) Personnel expense (nature) Depreciation and amortization (nature) Other operating income, net of other operating expense Operating profit Investment income Other income, net of other expense Net interest expense (income) Profit before taxes Tax expense Profit after taxes Minority interest Net profit 2010 108,483.0 (40,214.0) (14,216.0) (10,612.2) (12,663.0) 30,777.8 0.0 0.0 (1,163.3) 29,614.5 (7,492.5) 22,122.0 0.0 22,122.0 2009 101,393.0 (38,919.0) (13,576.0) (9,906.1) (11,793.0) 27,198.9 0.0 0.0 (1,028.6) 26,170.3 (6,748.0) 19,422.3 0.0 19,422.3 Condensed Income Statements (SEK m) Sales Net Operating Profit after Tax Net profit + Net interest expense after tax = Net operating profit after tax – Net Interest Expense after Tax = Net interest expense (income) x (1 – Tax expense/pre-tax income) = Net Interest Expense after Tax = Net Profit – Preferred stock dividends = Net Profit to Common 2010 108,483.0 22,991.0 22,122.0 869.0 22,991.0 869.0 1,163.3 74.7% 869.0 22,122.0 0.0 22,122.0 2009 101,393.0 20,185.7 19,422.3 763.4 20,185.7 763.4 1,028.6 74.2% 763.4 19,422.3 0.0 19,422.3 20 Financial Analysis Report – H&M Hennes & Mauritz AB Condensed Balance Sheet (SEK m) ASSETS Non-Current Tangible Assets Non-Current Intangible Assets Deferred Tax Asset Other Non-Current Assets Total non-current assets Trade Receivables Inventories Other Current Assets Cash and Marketable Securities Total current assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares Ordinary Shareholders’ equity Total shareholders’ equity Minority Interest Non-Current Debt Deferred Tax Liability Other Non-Current Liabilities (non interest bearing) Total non-current liabilities Current Debt Trade Payables Other Current Liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES 70,739.3 1,198.0 1,065.0 518.0 73,520.3 4,587.0 11,487.0 0.0 24,858.0 40,932.0 114,452.3 0.0 47,613.1 47,613.1 0.0 50,920.7 2,071.5 0.0 52,992.2 0.0 3,965.0 9,882.0 13,847.0 114,452.3 68,977.6 1,674.0 1,246.0 551.0 72,448.6 3,816.0 10,240.0 0.0 22,025.0 36,081.0 108,529.6 0.0 43,651.2 43,651.2 0.0 50,353.3 3,067.0 368.0 53,788.3 0.0 3,667.0 7,423.0 11,090.0 108,529.6 2010 2009 21 Financial Analysis Report – H&M Hennes & Mauritz AB Ending Net Working Capital (SEK m) Trade receivables + Inventories + Other current assets – Trade payables – Other current liabilities = Ending Net Working Capital + Ending Net Non-Current Assets Non-current tangible assets + Non-current intangible assets + Other non-current assets – Minority interest – Deferred taxes – Other non-current liabilities (non-interest- bearing) = Ending Net Non-Current Assets = Total Assets Ending Net Debt Current debt + Non-current debt – Cash = Ending Net Debt + Ending Preference Shares + Ending Shareholders’ Equity = Total Net Capital 2010 4,587.0 11,487.0 0.0 3,965.0 9,882.0 2,227.0 70,739.3 1,198.0 518.0 0.0 1,006.5 0.0 71,448.8 73,675.8 0.0 50,920.7 24,858.0 26,062.7 0.0 47,613.1 73,675.8 2009 3,816.0 10,240.0 0.0 3,667.0 7,423.0 2,966.0 68,977.6 1,674.0 551.0 0.0 1,821.0 368.0 69,013.6 71,979.6 0.0 50,353.3 22,025.0 28,328.3 0.0 43,651.2 71,979.5 Source: Own Estimates 22 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 9 – Adjusted standardized financial statements Inditex Income statement (EUR '000) Sales Cost of materials (nature) Personnel expense (nature) Depreciation and amortization (nature) Other operating income, net of other operating expense Operating profit Investment income Other income, net of other expense Net interest expense (income) Profit before taxes Tax expense Profit after taxes Minority interest Net profit 2010 12,526,595.0 (5,104,573.0) (2,009,429.0) (1,084,553.1) (1,174,310.0) 3,153,729.9 13,651.0 0.0 (53,782.0) 3,113,598.8 (817,909.2) 2,295,689.7 (9,451.0) 2,286,238.7 2009 11,083,514.0 (4,755,505.0) (1,791,632.0) (1,031,386.4) (1,028,156.0) 2,476,834.6 4,842.0 0.0 (68,258.6) 2,413,417.9 (614,407.4) 1,799,010.6 (7,783.0) 1,791,227.6 Condensed Income Statements (EUR '000) Sales Net Operating Profit after Tax Net profit + Net interest expense after tax = Net operating profit after tax – Net Interest Expense after Tax = Net interest expense (income) x (1 – Tax expense/pre-tax income) = Net Interest Expense after Tax = Net Profit – Preferred stock dividends = Net Profit to Common 2010 12,526,595.0 2,325,892.8 2,286,238.7 39,654.1 2,325,892.8 39,654.1 53,782.0 73.7% 39,654.1 2,286,238.7 0.0 2,286,238.7 2009 11,083,514.0 1,842,108.9 1,791,227.6 50,881.4 1,842,108.9 50,881.4 68,258.6 74.5% 50,881.4 1,791,227.6 0.0 1,791,227.6 23 Financial Analysis Report – H&M Hennes & Mauritz AB Condensed Balance Sheet (EUR '000) ASSETS Non-Current Tangible Assets Non-Current Intangible Assets Deferred Tax Asset Other Non-Current Assets Total non-current assets Trade Receivables Inventories Other Current Assets Cash and Marketable Securities Total current assets TOTAL ASSETS LIABILITIES AND SHAREHOLDERS’ EQUITY Preference Shares Ordinary Shareholders’ equity Total shareholders’ equity Minority Interest Non-Current Debt Deferred Tax Liability Other Non-Current Liabilities (non interest bearing) Total non-current liabilities Current Debt Trade Payables Other Current Liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES 6,719,578.2 704,789.0 299,350.0 222,346.0 7,946,063.2 481,844.0 1,214,623.0 72,593.0 3,433,452.0 5,202,512.0 13,148,575.2 0.0 6,940,592.7 6,940,592.7 36,984.0 2,691,263.4 410,252.2 394,575.0 3,496,090.5 2,682.0 2,458,857.0 213,368.0 2,674,907.0 13,148,575.2 6,653,031.9 678,235.0 234,203.0 185,669.0 7,751,138.9 421,781.0 992,570.0 109,334.0 2,420,110.0 3,943,795.0 11,694,933.9 0.0 5,806,039.6 5,806,039.6 41,380.0 2,810,299.0 377,266.4 354,989.0 3,542,554.4 35,058.0 2,103,029.0 166,873.0 2,304,960.0 11,694,933.9 2010 2009 24 Financial Analysis Report – H&M Hennes & Mauritz AB Ending Net Working Capital (EUR '000) Trade receivables + Inventories + Other current assets – Trade payables – Other current liabilities = Ending Net Working Capital + Ending Net Non-Current Assets Non-current tangible assets + Non-current intangible assets + Other non-current assets – Minority interest – Deferred taxes – Other non-current liabilities (non-interest- bearing) = Ending Net Non-Current Assets = Total Assets Ending Net Debt Current debt + Non-current debt – Cash = Ending Net Debt + Ending Preference Shares + Ending Shareholders’ Equity = Total Net Capital 2010 481,844.0 1,214,623.0 72,593.0 2,458,857.0 213,368.0 (903,165.0) 6,719,578.2 704,789.0 222,346.0 36,984.0 110,902.2 394,575.0 7,104,252.1 6,201,087.1 2,682.0 2,691,263.4 3,433,452.0 (739,506.6) 0.0 6,940,592.7 6,201,086.1 2009 421,781.0 992,570.0 109,334.0 2,103,029.0 166,873.0 (746,217.0) 6,653,031.9 678,235.0 185,669.0 41,380.0 143,063.4 354,989.0 6,977,503.5 6,231,286.5 35,058.0 2,810,299.0 2,420,110.0 425,247.0 0.0 5,806,039.6 6,231,286.5 Source: Own Estimates Appendix 10 – Impact of adjustments on leverage of H&M Leverage Net debt-to-equity ratio prior to adjustments Net debt-to-equity ratio after adjustments 2010 -37.2% 54.7% 2009 -45.3% 64.9% Source: Own Estimates 25 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 11 – Key financial ratios comparison H&M and Inditex Traditional decomposition of ROE Year Net profit margin (ROS) × Asset turnover = Return on assets (ROA) × Financial leverage = Return on equity (ROE) H&M 2010 20.4% 0.95 19.3% 2.40 46.5% 2009 19.2% 0.93 17.9% 2.49 44.5% Inditex 2010 18.3% 0.95 17.4% 1.89 32.9% 2009 16.2% 0.95 15.3% 2.01 30.9% Alternative decomposition of ROE Year Net operating profit margin × Net operating asset turnover = Operating ROA (1) Spread × Net financial leverage = Financial leverage gain (2) ROE = 1 + 2 H&M 2010 21.2% 1.47 31.2% 27.9% 0.55 15.3% 46.5% 2009 19.9% 1.41 28.0% 25.3% 0.65 16.5% 44.5% Inditex 2010 18.6% 2.02 37.5% 42.9% -0.11 -4.6% 32.9% 2009 16.6% 1.78 29.6% 17.6% 0.07 1.3% 30.9% Common-sized income statement Year Sales Cost of materials Personnel expense Depreciation and amortization Other operating expense Net interest expense/income Tax expense Profit from discontinued operations Net profit H&M 2010 100.0% -37.1% -13.1% -9.8% -11.7% -1.1% -6.9% 0.0% 20.4% 2009 100.0% -38.4% -13.4% -9.8% -11.6% -1.0% -6.7% 0.0% 19.2% Inditex 2010 100.0% -40.7% -16.0% -8.7% -9.4% -0.4% -6.5% 0.0% 18.3% 2009 100.0% -42.9% -16.2% -9.3% -9.3% -0.6% -5.5% 0.0% 16.2% Key profitability ratios Year EBITDA margin NOPAT margin Net profit margin H&M 2010 38.2% 21.2% 20.4% 2009 36.6% 19.9% 19.2% Inditex 2010 33.9% 18.6% 18.3% 2009 31.7% 16.6% 16.2% Asset management ratios Year H&M 2010 2009 Inditex 2010 2009 26 Financial Analysis Report – H&M Hennes & Mauritz AB Operating working capital/Sales Net non-current assets/Sales PP&E/Sales Operating working capital turnover Net non-current asset turnover PP&E turnover Trade receivables turnover Days’ receivables Inventories turnover Days’ inventories Trade payables turnover Days’ payables 2.1% 65.9% 65.2% 48.71 1.52 1.53 23.65 15.2 3.50 102.8 10.14 35.5 2.9% 68.1% 68.0% 34.19 1.47 1.47 26.57 13.5 3.80 94.7 10.61 33.9 -7.2% 56.7% 53.6% -13.87 1.76 1.86 26.00 13.8 4.20 85.7 2.08 173.4 -6.7% 63.0% 60.0% -14.85 1.59 1.67 26.28 13.7 4.79 75.1 2.26 159.2 Debt, coverage and liquidity ratios Year Current ratio Quick ratio Cash ratio Operating cash flow ratio Liabilities-to-equity Debt-to-equity Net debt-to-equity Debt-to-capital Net debt-to-net capital Interest coverage (earnings based) Interest coverage (cash flow based) H&M 2010 2.96 2.13 1.80 1.58 1.40 1.07 0.55 0.445 0.35 26.46 25.13 2009 3.25 2.33 1.99 1.62 1.49 1.15 0.65 0.464 0.39 26.44 23.54 Inditex 2010 1.94 1.49 1.28 0.96 0.89 0.39 -0.11 0.20 -0.12 58.65 64.46 2009 1.71 1.28 1.05 1.01 1.01 0.49 0.07 0.24 0.07 36.20 45.61 Key profitability ratios Year ROE Dividend payout ratio Sustainable growth rate H&M 2010 46.5% 59.8% 18.7% 2009 44.5% 66.0% 15.1% Inditex 2010 32.9% 32.9% 22.1% 2009 30.9% 37.0% 19.4% Source: Own Estimates 27 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 12 – H&M sales growth drivers Table 1: Trailing twelve months growth rates Region Germany Nordics Rest of Europe Asia Americas Franchise Global Shops 2% 1% 5% 39% 5% 22% 5% Sales per shop -5% -5% -5% -14% -1% -1% -5% Sales -2.8% -3.5% 0.3% 20.3% 3.5% 20.4% 0.4% Table 2: Trailing twelve months actual sales (SEK m) Region Germany Nordics Rest of Europe Asia Americas Franchise Global Shops 386 404 1,100 99 275 61 2,325 Sales per shop 64.83 40.66 44.46 61.88 41.15 17.75 46.83 Sales 25,024 16,425 48,905 6,127 11,317 1,083 108,880 Source: H&M Hennes & Mauritz AB reports Appendix 13 – H&M sales forecasts Measure Number of shops Yoy Growth Sales Yoy Growth 2011 2,325 5.4% 109,075 0.4% 2012 2,461 5.8% 111,888 2.6% 2013 2,618 6.4% 115,348 3.1% 2014 2,806 7.2% 117,886 2.2% Terminal 3,008 7.2% 120,475 2.2% Source: Own Estimates 28 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 14 – Forecasted condensed Financial Statements SEK (m) Balance Sheet Net Working Capital + Net NC Assets = Net Assets Net Debt + SH Equity = Net Capital Income Statement Sales NOPAT - Net interest expense after tax = Net Profit 2011 2,235 71,713 73,948 26,159 47,789 73,948 2,235 108,884 22,321 1,168 21,154 2012 2,293 73,578 75,871 26,839 49,032 75,871 2,293 111,715 22,951 1,225 21,726 2013 2,364 75,859 78,223 27,671 50,552 78,223 2,364 115,179 24,523 1,290 23,232 2014 2,416 77,528 79,944 28,280 51,664 79,944 2,416 117,712 25,062 1,347 23,715 Term 2,470 79,233 81,703 28,902 52,801 81,703 2,470 120,302 25,614 1,377 24,237 Operating ROA Operating ROA ROE BV of Assets Growth Rate BV of Equity GR Rate Net Operating Asset Turnover 2011 30.2% 44.3% 0.4% 0.4% 1.5 2012 30.2% 44.3% 2.6% 2.6% 1.5 2013 31.3% 46.0% 3.1% 3.1% 1.5 2014 31.3% 45.9% 2.2% 2.2% 1.5 Term 31.3% 45.9% 2.2% 2.2% 1.5 Cash Flow Net profit - ∆ net working capital - ∆ net non-current assets + ∆ net debt Free cash flow to equity NOPAT - ∆ net working capital - ∆ net non-current assets Free cash flow to capital 2011 21,154 (8) (264) 96 20,978 22,321 (8) (264) 22,049 2012 21,726 (58) (1,865) 680 20,484 22,951 (58) (1,865) 21,028 2013 23,232 (71) (2,281) 832 21,712 24,523 (71) (2,281) 22,171 2014 23,715 (52) (1,669) 609 22,603 25,062 (52) (1,669) 23,341 Term 24,237 (53) (1,706) 622 23,100 25,614 (53) (1,706) 23,855 Source: Own Estimates Appendix 15 – Beta Calculation In order to determine H&M’s cost of capital, we have first determined the equity beta’s of H&M and two of its main competitors, Inditex and Marks & Spencer, by regressing (for three and five years) their monthly returns against the returns on the MSCI Europe Index. After obtaining the 29 Financial Analysis Report – H&M Hennes & Mauritz AB equity betas, we have calculated the asset beta’s (we assume a debt beta of zero which seems plausible given the fact H&M hardly used debt financing signalling superior creditworthiness). By taking the average asset beta of the three companies, we calculated again the equity beta for H&M. Depending on both the time horizon chosen and the index used (we used both MSCI Europe and Vanguard) we obtained a maximum equity beta of 0.34 for H&M. Appendix 16 – WACC calculation Risk free rate is equal to 2.78%. This risk-free rate is based on the yield of ten-year Swedish government bonds between April 2010 and October 2011. We have taken an average of the rates that were observed each month between April 2010 and October 2011. Source: Sveriges Risk Bank, http://www.riksbank.com/ The equity beta obtained for H&M was calculated by using the average equity betas of FT (0.55), Reuters (0.56) and Thomson One Banker (0.53). This gave us an equity beta of: (0.56+0.55+0.53)/3 = 0.55. Market risk premium is equal to the historical risk premium of 5.5% Costs of equity = risk free rate + Beta * (market risk premium) = 2.78% + 0.55*(5.5) = 5.79%. The cost of debt is assumed to be equal to 2.7% as explained earlier in footnote 4 of the accounting analysis. WACC is calculated using the formula below: Net debt equals: 34,229.70 SEK m. For equity, we have taken the market value of equity. This was calculated by multiplying the number of shares outstanding at November 30th, 2010 * share price at November 30th, 2010. This gives us a market value of: (1,655,072,000 * 237,40 SEK) / 1,000,000 = 392,914.09 SEK m. The after tax costs of debt are equal to 2.7% * (1-0,253) = 2.02%. Net debt / Net debt + Equity = (34,229.70) / (392,914.09 + 34,229.70) = 0.065. Equity / Net debt + Equity = 1 – 0.065 = 0.925 Plugging in all values in the formula gives a WACC of: (0.07 * 2.02) + (0.92*5.79) = 5.48% 30 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 17 - Estimates of Value of Equity Table 3: Total Equity Value (SEK m) Valuation Method Abnormal earnings Free Cash Flow to equity Abnormal earnings growth Beginning book value 47,613.10 Capitalized NP2010 365,348.79 Value between 2010 and 2014 84,186.91 91,951.23 43,378.87 Terminal value 456,458.54 496,307.33 179,530.89 Total Value 588,258.55 588,258.55 588,258.55 Source: Own Estimates Appendix 18 - Estimated of Share Price beyond Terminal Year under the two Scenarios AE > 0 beyond terminal year Total Value SEK 588,258.55 m Price per share SEK 355.43 AE = 0 beyond terminal year Total Value SEK 131,800.01 m Price per share SEK 79.63 Source: Own Estimates 31 Financial Analysis Report – H&M Hennes & Mauritz AB Appendix 19 – Sensitivity analysis Share Price Sensitivity 3.70% 3.20% 2.70% 2.20% 1.70% 1.20% 0.70% Terminal Growth Rate Cost of Equity 6.29% 6.79% 452.55 379.65 390.48 336.25 345.70 303.45 311.87 277.81 285.41 257.20 264.15 240.27 246.69 226.13 5.29% 735.85 576.78 479.13 413.08 365.43 329.43 301.28 5.79% 560.32 465.65 401.62 355.43 320.53 293.23 271.30 7.29% 327.06 295.27 270.41 250.43 234.03 220.32 208.69 7.79% 287.31 263.22 243.86 227.96 214.67 203.40 193.72 8.29% 256.22 237.46 222.06 209.18 198.26 188.87 180.73 Figure 3: Share price sensitivity to the cost of equity and the terminal growth rate Source: Own Estimates 32