By Anna Ringstrom and Helena Soderpalm
STOCKHOLM (Reuters) - Hennes & Mauritz (ST:HMb), the world's second-biggest fashion retailer, reported a bigger than expected rise in profits over the last three months but cautioned that the strong dollar would increasingly affect costs this year.
The Swedish firm said on Tuesday that well-received collections, a tight control on costs and further expansion of the business, both online and with more stores, boosted market share and profits in its fiscal first quarter.
Pretax profit rose 34.3 percent to 4.7 billion crowns (368.8 million pounds) in the three months to end-February. The average forecast given by analysts polled by Reuters had been for a profit of 4.4 billion crowns.
H&M said sales, which it had already reported last week were up 25 percent at 40.3 billion crowns in the period, had carried slightly reduced markdowns than a year earlier and that the gross margin was little changed at 55 percent despite somewhat higher costs.
Sales so far in March, however, were up 9 percent in local currencies, which analysts said was a disappointment. H&M last reported single-digit growth in September.
"It's been a tough market. Spring hasn't really kicked in," Chief Executive Karl-Johan Persson told a news conference.
H&M is spending heavily on online commerce, new ranges, designer collections and higher-end brands such as COS to keep up with biggest rival Inditex (MC:ITX), the owner of Zara, and to protect margins over the long term amid increasing price competition from discount chains such as Primark (L:ABF).
"H&M had a very strong Q1," said Bernstein analyst Jamie Merriman, who has an "underperform" rating on the shares.
"The question for the stock today will be around outlook, however, given a slow sales start to Q2 and increasing cost pressure in the remainder of the year given U.S. dollar strength."
DOLLAR HITS PURCHASING POWER
H&M said that while its sourcing costs were set to rise this year due to the strength of the U.S. dollar, it would still make sure "it has the best customer offering in each individual market", implying it may not pass on those costs to customers in the form of higher prices.
The dollar has strengthened sharply in the past year and earlier in March reached a near 12-year high against major currencies.
H&M is widely seen growing at a healthy pace this year as it plans to open 400 new stores, most of which in China and the United States, and roll out e-commerce in nine more markets.
But because H&M makes most purchases in U.S. dollars while it has a large share of sales in euros, analysts fear margins will be increasingly dented this year by the dollar appreciation.
Shares in H&M, which have been under pressure on the concerns, were down 2.4 percent at 345 crowns by 0942 GMT, around 25.5 times forecast earnings, according to Thomson Reuters data.
Shares in Inditex, which posted a 5 percent rise in full-year profits last week and produces its own clothing, were trading at 32 times forecast earnings on Tuesday.