Give the Swedes credit - they know what people like when it comes to cheap chic. IKEA has stormed the world with popular (if quirky) flat-pack furniture, and now retailing giant Hennes & Mauritz (Nasdaq:HNNMY) is doing the same in the clothing world. Although H&M is still relatively unknown in the U.S., H&M operates around 2,000 stores around the world and is a major clothing retailer in much of Western Europe.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Quarter that Was
H&M continues to post excellent growth as people gravitate toward the company's mix of attractive styling and prices. Total sales were up 14% in the third quarter, with comparable sales up about 11%. The company has opened about 105 new stores so far this year, even though it has mentioned that a slower pace of mall openings has curtailed their near-term store expansion goals somewhat.

The reaction in Europe to these earnings was not all positive, though. The company did see a 110 basis point drop in gross margin and rising costs are the number one worry for most analysts and institutional investors. H&M is critically dependent upon cheap product sourcing as an engine of their value pricing, so rising costs in major production areas in Asia are a real threat. Nevertheless, the company did still manage to produce 20% operating income growth and boost operating margins by more than a full percentage point.

The Road Ahead
H&M is taking a methodical approach to its U.S. expansion and these stores are hardly a common site in most communities yet. That is both a blessing and a curse for other value-oriented retailers like Aeropostale (NYSE:ARO), Chicos (NYSE:CHS), Buckle (NYSE:BKE) and Gap's (NYSE:GPS) Old Navy line. Granted, competition is nothing new in retail (whether in the high-end or value-priced markets), but the last thing any retailer needs right now is a popular new option with good fashions and very competitive prices. With no reason to think that H&M is going to slow its plans to grow the U.S. business, these entrenched mall competitors will need to figure out ways to drive even more costs out of the supply chain and stay right on top of trends or they risk getting left behind. (For related reading, see Is Aeropostale A Bargain?)

The Bottom Line
Hennes & Mauritz is not a cheap stock right now, but it rarely has been during its run into becoming a major international retailer. H&M's P/E is about two-thirds higher than the apparel store average in the U.S., but H&M is growing at a double-digit rate (while most U.S. retailers are struggling to get single-digit growth). The operating margin is four times better than average, and the company has a dividend yield north of 4%.

Maybe there is some irony in that the value retailer H&M carries a premium, while a premium retailer like Nordstrom (NYSE:JWN) carries a discount. Irony aside, H&M has done a lot to earn that premium. Given that value almost never goes out of style and there are plenty of sizable markets left for H&M (North America, Japan, China), H&M has ample room to continue to grow. There will always be competition along the way, and rising supply costs is an ever-present threat as well, but H&M is a stock that growth investors might not want to leave on the rack. (For more, see Angst Among Teen Retailers.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  2. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  3. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
  4. How do I use discounted cash flow (DCF) to value stock?

    Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
  5. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  6. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!