By Anna Ringstrom and Helena Soderpalm
STOCKHOLM (Reuters) - Fashion group H&M (ST:HMb) said on Friday large markdowns capped its third-quarter turnover at 5 percent but noted autumn sales had started well.
The world's second largest clothing retailer after Zara owner Inditex (MC:ITX) reported net sales of 51.2 billion crowns ($6.4 billion). Analysts in a Reuters poll had forecast sales of 51.6 billion.
Local-currency growth was 4 percent, just below forecast.
"Sales in the quarter were affected by a significantly larger summer sale this year than in the corresponding quarter last year - both in terms of the number of items and the average discount per piece - which had a dampening effect on revenue growth," the company said.
On a positive note, it said the aggressive summer markdowns had led to an improved inventory position ahead of the fourth quarter and that autumn sales had gotten off to a good start.
H&M shares were up 1.2 percent at 0702 GMT. They are down 15 percent this year.
The Swedish retailer has launched several independent and mostly higher-end brands in recent years to broaden its customer base in the face of growing competition in its core budget segment, but the H&M chain still accounts for the bulk of its sales.
H&M is also pushing to improve versus pure-online players, such as Asos (L:ASOS) and Zalando (DE:ZALG), in a market that is transforming even faster than H&M had expected.
Societe Generale (PA:SOGN) analyst Anne Critchlow said structural challenges, namely the rapid shift online in young fashion, are weighing on like-for-like sales and H&M's operating margin.
"H&M's LFL (like-for-like) sales have suffered due to a sub-optimal online offer: in most countries, online is not yet integrated with the stores and free delivery and free returns are not available," said Critchlow, who holds a "sell" recommendation on H&M's shares.
"EBIT margins have also suffered due to the lack of LFL sales leverage. We see online investment and disappointing LFL eroding the EBIT margin for some time to come," she said.
H&M will publish its full June-August report on Sept. 28.