Stock Split

The term stock split or stock divide refers to the aspect of increasing the
number of equity shares in a public company. The price of shares is adjusted
such that the market capitalization of the company will remain the same after
the split, so that dilution does not occur. Options and warrants are included. A
stock split is a decision by the company's board of directors to increase the
number of shares that are outstanding by issuing more shares to current
shareholders.

Reverse Stock Split

On a stock exchange, a reverse stock split or reverse split is the opposite
of a stock split, i.e. a stock merge - a reduction in the number of shares and
an accompanying increase in the share price. The ratio is also reversed: 1-for-
2, 1-for-3 and so on. Typically, the stock will temporarily add a "D" to the end
of its ticker during a reverse stock split.

There is a stigma attached to take up a stock split (or) a reverse

stock split and so it is not initiated without very good reason.

• The primary motive is to make shares seem more affordable to small

investors even though the underlying value of the company has not
changed.
• An extreme case would be when a share price has dropped so low that it
is in danger of being delisted from its stock exchange.
• It is also possible that a reverse stock split could be used as a tactic to
reduce the number of shareholders.

Hennes & Mauritz - Stock split 2:1 & Headwind from

currency
H&M conducts a 2:1 stock split increasing its number of shares from 827.5m
to 1,655m. The company had conducted its previous stock split, 4:1, in May
1999. Empirical research suggested that it would be marginally positive.
 H&M is one of the world's
largest fashion retailers.
Established in Sweden in
1947, the Persson family
own 36% of its shares. It
operates over 2000 stores
in 35 countries. Its largest
market is Germany (25% of
sales) followed by the
Nordic region (17% of
sales), France (7%), the UK
and the US with (6%). H&M
also operates under its
banner a small number of
stores in the more upscale
COS format, along with the

Reasons for the Split:

• The decision to double the number of shares in issue came in response to

demand from investors. And there this latest move was comparatively less
dramatic than their previous stock splits which multiplied the number of
shares by a factor of four and five.

Revision of Estimates due to 2:1 share split:

Following the stock split announcement made by H&M during its Annual
General Meeting (AGM) as on 29th April, 2010 the per share data measures
had seen an immediate effect over there valuations. The split was approved
as a 2:1 share split, were in each existing share holder as on the record date
of the spit was entitled receive 2 shares for every 1 share held.

Exhibit 1: Pre & Post Split Valuations of specific Data-measures

Source: Barclays Bank
Eventual impact of the split on the other data measures
• The Market capitalization which on a broad-spectrum does not change
(remains analogous), has had a negative impact on H&M post the split.
The reason being the split announcement had seen the market value of
the stock dipping down by 3.8 SEK (Swedish Krone)
• The measures have also increased the number of outstanding shares
from 97,200,000 series A shares and 730,336,000 series B shares to
194,400,000 series A shares and 1,460,672,000 series B shares
respectively.
• The Post split impact is also seen over the routinely evaluated historical
52 week average daily volume with regards to the market value of shares
traded. This measure reflects the average low and high price ranges that
the share has traded in the last or previous financial year.
• The Return on Equity (ROE) of the firm has also seen to have had a
moderate change with the pre split values diminishing post the
announcement of the split event.
• Heading to the Book value per Share (BVPS), the company had no
reactions to this value and hence forth the estimates were not applicable
(N/A). Post the event’s announcement the BVPS of the firm has been
recorded as 26.43SEK

Exhibit 1: Pre & Post Split Valuations of Earnings per Share of H&M
Source: Barclays Bank

Post split impact on Earnings per Share

• The Earnings per Share of the firm have gone half way down with a drastic
doubled increase in its outstanding shares. The effect has also been
carried on the same pace for the forecasted 2011 & 2012 estimates of the
firm.
• The shrink in the Earnings per Share of the firm has also been a vital
reason for the trim down in its market capitalization.

Exhibit 2: Pre & Post Split Valuations of the Dividend per Share (DPS).

Source: Barclays Bank reports

Dividends douse down – Shareholders expectations traumatized

• The Post split valuation of the dividends estimated to be paid by the
company had come down significantly. The phasing down of dividends has
furthermore added up as a reason for the dwindling of the firm’s market
capitalization.

Exhibit 2: Pre & Post Split Valuations of the target price.

Source: Barclays Bank reports

Ultimate impact on the Price Target:

 Price-Target: It is the price at which an investor hopes to buy or sell a
security. That is, when an investor takes a position on a security he/she
hopes that the investment will become profitable. The target price is
the price at which the investment becomes worth the effort and
money put into it.
• The overall impact of the split inconsideration to the decrease &
increase the valuation of diverse data-measures has by and large
blown the target price of the firm. The expected future price was
lowered radically by -50%.

It is known that a stock split has no fundamental impact on the value of the
company. Theory and empirical research suggest that due to higher liquidity
and psychological effects, there is often a marginal positive impact from a
stock split.

The allusion of the share split event has had temperate impact on the Shares
of the firm in totality. The shares in H&M, which had risen around 41 percent
since the start of 2009 against a rise of 36 percent in the wider European
retail sector, were affected by the news and traded flat at 440 crowns in the
region.

Outlook of H&M’s future investment thesis

H&M continues to benefit from favorable buying conditions in Asia and it is
expected to protract to post a stronger gross margin than the market expects
for the rest of this year. H&M also appears to have improved the price and
quality of its offer for Spring/Summer which is driving stronger LFL sales
growth. In the longer term there is still some concern driven over the
sustainability of H&M's high gross margin and the adaptability of the core
H&M format and less developed formats to different apparel markets.