UPDATE 2-Emerging markets hold no fears for big-spending H&M

Thu Jan 30, 2014 9:32am EST

* Investing heavily in online, new brands and products

* Blames gross margin fall on foreign exchange rates

* CEO sees developing markets as "great opportunity"

* Plans 375 new stores and online expansion in 2014

* Dividend held at 9.50 Swedish crowns

By Mia Shanley and Emma Thomasson

STOCKHOLM, Jan 30 (Reuters) - Hennes & Mauritz's rapid expansion will continue apace, the world's second-biggest fashion retailer said on Thursday after reporting that heavy investment in its online offering and new brands depressed fourth-quarter profit.

H&M's gross margin, which showed its first quarterly rise in three years in the third quarter, slipped more than expected to 60.8 percent from 61.6 percent.

Though the company attributed much of the margin fall to foreign exchange rates, Chief Executive Karl-Johan Persson said that a sell-off in emerging market currencies would not deter H&M from investing in the likes of China, where it plans to open 80-90 new stores this year among 375 planned worldwide.

"We always live with a bit of a currency risk," Persson told Reuters. "We are entering more developing countries and we see great opportunity to grow there."

The margins also highlight the challenges H&M faces in its efforts to improve working conditions at suppliers in low-cost production centres such as Bangladesh and China, though the company insisting that an ethical approach and a budget-fashion business model are compatible.

The Swedish retailer has almost tripled store numbers over the past decade to 3,132 outlets in 53 countries, but most of its sales still come in Europe, where it was harder hit by the economic downturn than bigger rival Inditex.

Emerging markets account for a bigger slice of sales at Inditex, the Spanish owner of the Zara retail chain, than they do at H&M.

SHARES FALL

H&M's shares were down 3.2 percent by 1325 GMT, compared with a 1 percent weaker European retail index and a 0.7 percent fall for Inditex, taking them almost back to where they were trading after reporting a margin improvement in September.

Analysts said investors were reacting to the gross margin figure even though they were encouraged by the news that sales growth accelerated to 15 percent in January from 10 percent in December, the first month of H&M's financial year.

"Given their optimistic outlook for 2014, the four new online launches that should boost sales this year and strong trading in January, I would expect that shares could recover," Barclays analyst Chris Chaviaras said.

The company said it will launch an online store in France in spring or summer, with three more large markets to follow before the end of 2014, taking the total to 13.

H&M has also come up against margin-eroding price competition from discount brands such as Britain's Primark and Forever 21.

In response, it has invested in two growing mid-market brands - & Other Stories and COS - and is introducing more premium products. It will open its first U.S. branch of COS in New York this year and has also launched a new sportswear range.

ROOM FOR GROWTH

H&M plans to enter Australia, the Philippines and a couple of other new markets in 2014, but Persson still sees plenty of room to grow in countries where it is well established, including its top three markets of Germany, the United States and France.

Persson said the launch of U.S. online sales in August had been well received and it will further raise its U.S. profile with a TV advertisement featuring former England soccer star David Beckham during the Super Bowl.

Fearing that online operations could cannibalise more profitable store sales, high street fashion chains have been slow to embrace e-commerce, though Inditex has entered more markets than H&M and is considered more likely to benefit because of higher-margin garments and centralised logistics.

"We have a good profitability online," H&M's Persson said, though he declined to give online sales figures, saying that the business is becoming increasingly integrated.

"We believe a lot in our online business. The plan is to expand globally."

Quarterly pre-tax profit rose 11 percent to 7.3 billion Swedish crowns ($1.13 billion), missing average analyst forecasts for 7.6 billion crowns, while the dividend was held steady at 9.50 crowns per share.

H&M said that an unseasonably warm autumn in Europe led to more discounting than a year ago and it predicted markdowns in the first quarter at the same level as in 2013.