By Anna Ringstrom and Helena Soderpalm
STOCKHOLM (Reuters) - Hennes & Mauritz (ST:HMb), the world's No.2 fashion retailer, missed quarterly earnings forecasts as it spent heavily on new ranges and websites in its battle with cut-price rivals, a drive it plans to extend in 2015 with a new beauty line.
H&M said on Wednesday pretax profit rose 7 percent to 7.80 billion Swedish crowns (627 million pounds) in the three months ended November, missing analysts' average forecast of 7.96 billion as it booked a staff incentive payout.
The Swedish company is investing heavily in new concepts including sportswear and higher-price brands such as COS to try to protect margins over the long term as discount chains Primark (L:ABF) and Forever 21 push prices down.
It aims to keep that up in 2015, planning to add 400 stores to its current 3,511, bring online sales to another nine markets and launch a new range of beauty products, as well as speeding up expansion of upmarket brands including COS.
H&M, also trying to catch up with more diversified industry leader Inditex (MC:ITX), owner of the Zara brand, saw its shares fall 2.2 percent by 0920 GMT, underperforming a flat European retail sector (SXRP).
"These are disappointing results, as margins continue to decline," said Bernstein analyst Jamie Merriman, who rates the stock "underperform". "We expect continued margin compression."
H&M said markdowns in its fiscal fourth quarter were lower than the year before, but cost inflation was higher, adding it expected that to continue in the first quarter, with a stronger dollar likely to increase sourcing costs throughout the year.
H&M, which buys most of its clothes in dollars from Asian suppliers, said most of its new stores would be in China and the United States, while it would enter Taiwan, Peru, Macau, South Africa and India and go online in nine new European markets.
The group, more exposed to sluggish European markets than Inditex, also plans around a hundred new homewear departments and will launch a new range of make-up, body care and hair care in the autumn in around 900 stores and online.
It predicted a 14 percent rise in sales for January after a 15 percent increase in December, the start of its first quarter.
H&M's shares trade at 25.2 times forecast earnings, below 29.9 for Inditex -- which buys more goods closer to home, allowing it to respond more quickly to shifts in demand -- but at a premium to other large fashion rivals.
It proposed a dividend of 9.75 crowns, below a forecast 10.10 crowns.