UPDATE 1-H&M speeds up expansion as Q1 pretax falls
* Dec-Feb pretax 3.23 bln SEK vs consensus 3.26 bln
* Gross margin 55.2 pct vs consensus 55.6 pct
* Says March sales hit by cold weather
* Enters Q2 with higher inventories than expected (Adds detail, background)
STOCKHOLM, March 21 (Reuters) - Hennes & Mauritz, the world's second-biggest fashion retailer, will speed up store expansion in the face of weak European demand after unusually big markdowns pushed down profits more than expected in the first quarter.
The Swedish group, whose biggest rival is Zara owner Inditex, does the bulk of its business in Europe, where the region's debt crisis and rising unemployment have dampened consumer spending.
"The first quarter has been characterised by the continued challenging situation for the fashion retail industry in many of our markets mainly due to a continued tough macro-economic climate, but also due to unfavourable weather during parts of the quarter," Chief Executive Karl-Johan Persson said.
It said markdowns dragged down the gross margin in the December-February period to 55.2 percent from 55.8 percent a year earlier, below a 55.6 percent forecast in a Reuters poll of analysts.
Pretax profit was 3.23 billion crowns ($499.9 million), down from 3.70 billion and below a forecast 3.26 billion. H&M already earlier unveiled that sales stood at 28.4 billion crowns, up 2 percent.
"With the high level of stocks and tough current trading we will in the second quarter have a weak gross margin again," said Natixis analyst Jean-Baptiste Teissier.
The company on Thursday warned that March sales had been hit by cold weather in Europe and the United States, and said stocks were higher than expected at the end of the first quarter.
H&M has been making long-term investments in online shopping and new chains of stores, such as recently-launched "& Other Stories" to broaden its customer base, following Inditex which runs a string of other chains alongside Zara.
Barclays analyst Christodoulos Chaviarras said the report was a mixed bag.
"There is good reception of & Other Stories and an increased new store openings guidance ... it shows that H&M grows well in the longer term, and actually potentially has accelerated growth," he said.
"But on the other hand you have the warning on current trading given the unseasonal weather that is going to drag sentiment. So it seems like we're set for double-digit like-for-like (sales) declines in March."
H&M said it now planned to open around 350 new stores this fiscal year, compared with the 325 previously planned, and announced that it would enter Australia next year.
($1 = 6.4615 Swedish crowns) (Reporting by Stockholm Newsroom)
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