UPDATE 1-H&M Q1 pretax lags forecast on costs and discounts

Thu Mar 29, 2012 2:48am EDT

* Pretax profit 3.7 bln crowns, vs forecast 4.2 bln

* Says sales at start of year have been strong (Adds background, detail, quotes)

STOCKHOLM, March 29 (Reuters) - Hennes & Mauritz, the world's second-largest fashion retailer, posted a smaller-than-expected rise in quarterly pretax earnings, blaming higher costs and discounts for offsetting strong sales.

H&M has struggled for more than a year with rising cotton prices, a strong Swedish crown and an increase in costs for other items like wages in Asia and transport.

Unlike rivals, like Zara-owner Inditex, H&M chose to hold down prices, further hurting its gross margin.

After profit slipped for five quarters in a row, earnings grew again in the December-February period, measured against a year-earlier.

But profit was lower than analysts had expected with the company blaming higher purchasing costs - particularly cotton - investments and discounts on its clothes needed to clear its stock.

Pretax profit at the Swedish budget apparel firm came in at 3.7 billion Swedish crowns ($554 million) for the fiscal first quarter versus a year-ago 3.5 billion and a mean forecast of 4.2 billion in a Reuters poll of 18 analysts.

H&M's gross margin came in at 55.8 percent, well below expectations of 57.6 percent.

Sales at the start of the year have been strong, however, and H&M said that trend had continued in March.

"Sales have been good in most markets and have been particularly strong in big markets such as the US, UK, Germany and France, while sales have been weaker in Switzerland, Japan and Greece," H&M said.

The company said March 1-27 sales were up 22 percent in local currencies compared to the same period a year ago.

H&M said it would open a new line of stores next year, but gave no further details.

($1 = 6.6818 Swedish crowns)