TOPICS FOR THE SESSION

 Exercise 3

 Sensitivity analysis

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

Exercise 3

• What kind of information is provided in the case? What are the primary drivers of H&M’s

revenue growth in 2018-2020?

• Do you agree with the assumptions made by the analyst? Can you think of a summary

approach to compute the forecast for revenue growth?

• How to prepare the CF forecasts and the pro forma BS?

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Information provided

• Macroeconomic information:
o industry growth rates
• Management information – MDA and notes to the FS:
o forecast about number of stores
• Financial analysis:
o online sales trends
o revenue per store’s drivers: foreign currency effects, sales mix and sales
cannibalization, consumer demand and inventories write-downs

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 What are the primary drivers of H&M’s revenue growth?

- The assumptions about the drivers are made by the analyst (in this case, the authors of the book PHP).
Other assumptions are possible and there is not a correct/incorrect assumption, it all depends on the
rationale and on the information provided.

- All the effort should be put on explaining the rationale and giving numbers accordingly.

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

  Summary approach to compute the forecast for revenue growth
FY2016 FY2017 FY2018 FY2019 FY2020 FY2021e FY2022e

Total Revenues (in store + online) 192,267 200,004 210,400 232,755 187,031 258,820 277,992
Implied growth rate (%) 6.3 4.0 5.2 10.6 -19.6
Industry growth rates (%) 2.6 2.5 2.7 2.6 -16.7 17.1 3.3
Factor relative to industry (times) 2.4 1.6 1.9 4.1 1.2
Factor relative to industry (times) 2.2 2.2 2.2
Expected growth rates = factor* industry growth rate 6.3 4.0 5.2 10.6 -19.6 38.4 7.4
Total Revenues (in store + online) 192,267 200,004 210,400 232,755 187,031 258,820 277,992

Total Revenues (in store + online) 213,192 258,012

Implied growth rate (%) 14.0 21.0

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 How to prepare the CF forecasts and the pro forma BS?

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Pro – forma Condensed FS

Fiscal year How? ORDER

Income statement (SEK millions)
Sales revenue = revenue * (1+growth) 1
+ Net operating profit after tax = NOPATmargin*revenue 2
+ Net investment profit after tax = after tax return on investment assets * Investment assets 9
= Net business profit after tax
– Net interest expense after tax = after tax cost of net debt * Debt 10
= Net profit

balance sheet (SEK millions)

+ operating working capital = operating WC to revenue * revenue 3
+ net non-current operating assets = net non-current operating assets to revenue * revenue 4
+ investment assets = investment assets to revenue* revenue 5
= Business assets Assets = 3+4+5
+ Debt = debt-to-capital ratio * capital 7
+ Group equity 8 by difference
= Capital 6 = assets

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Pro – forma Condensed FS

Fiscal year REAL 2020 2021e 2022e 2023e

Income statement (SEK millions)
Sales revenue 187,031.0 213,215.3 257,990.6 273,470.0
+ Net operating profit after tax 2,065.1 8,741.8 18,317.3 19,963.3
+ Net investment profit after tax 196.6 64.0 77.4 82.0
= Net business profit after tax 2,261.7 8,805.8 18,394.7 20,045.4
– Net interest expense after tax -1,018.7 -1,183.7 -1,317.4 -1,412.1
= Net profit 1,243.0 7,622.1 17,077.3 18,633.2
Balance sheet (SEK millions)
+ operating working capital 22,916.6 17,910.1 15,479.4 9,844.9
+ net non-current operating assets 103,502.0 112,364.5 111,967.9 112,122.7
+ investment assets 8,881.5 2,132.2 2,579.9 2,734.7
= Business assets 135,300.0 132,406.7 130,027.2 124,702.3
+ Debt 80,677.0 78,914.4 77,496.2 74,322.6
+ Group equity 54,623.0 53,492.3 52,531.0 50,379.7
= Capital 135,300.0 132,406.7 130,027.2 124,702.3
Cash flows (SEK millions)
Net profit 7,622.1 17,077.3 18,633.2
– Change in operating working capital 5,006.5 2,430.7 5,634.5
– Change in net non-current operating assets -8,862.5 396.6 -154.8
– Change in investment assets 6,749.3 -447.8 -154.8
+ Change in debt -1,762.6 -1,418.2 -3,173.7
= Free cash flow to equity 8,752.8 18,038.6 20,784.5
Net operating profit after tax 8,741.8 18,317.3 19,963.3
– Change in operating working capital 5,006.5 2,430.7 5,634.5
– Change in net non-current operating assets -8,862.5 396.6 -154.8
= Free cash flow from operations 4,885.8 21,144.6 25,443.0

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Sensitivity analysis

 Forecasts should be done with more than one possible set of assumptions in
mind.

 In H&M’s case, there are at least two likely alternative situations to those
used for the forecasted financial statements:

 Upside case: Projected effects of competition turn out to be too

pessimistic, resulting in higher NOPAT margins.

 Downside case: projected increase in H&M’s store productivity turns

out to be too optimistic, flattening the company’s revenue growth.

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Sensitivity analysis

 Scenario analysis: Adjust key assumptions, typically through “pessimistic,” “base,” and
“optimistic” scenarios
o Disadvantages:
- Change only one variable at each time, otherwise becomes too complex
- Changes are deterministic
o In the current macro-economic environment (COVID times), you are expected to
analyze different economy recovery scenarios
Deloitte provides an analysis for US market:
https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-
states-outlook-analysis.html

 Simulation analysis:
o Advantages:
- Changes are stochastic following a distribution

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes

 Deliveries and deadlines:

 Deadline coursework + peer evaluation: 16/Oct (Monday) by 10 pm

• Report uploaded on Moodle by course representative;

• Peer evaluation to be done directly on Moodle; this has to be submitted only if

you consider that the work was not done equally by all members; consider the

instructions; if these are not followed, peer evaluation is not considered;

FINANCIAL ANALYSIS & FORECASTING| Joana Cardoso Fontes