* Q1 pretax profit 3.5 bln SEK vs consensus 3.8 bln
* Gross margin 54.9 pct vs forecast 55.3 pct
* Investing online, to launch in Spain, Italy and China
* Says macroeconomic environment still challenging
* Shares down 4.1 percent
(Recasts with CEO comments, updates shares)
By Mia Shanley and Helena Soderpalm
STOCKHOLM, March 27 A drive to increase wages
for Asian clothing workers is likely to hit profit margins at
world No.2 fashion retailer Hennes & Mauritz (H&M) as weak
consumer demand and stiff competition make it hard to pass on
the cost to shoppers, it said on Thursday.
The Swedish group issued its warning after missing
first-quarter profit forecasts, due in part to investments aimed
at catching up with rivals in fast-growing online fashion sales.
Asian factories, which churn out the bulk of clothes for the
world's budget fashion market, have come under international
pressure to improve wages and working conditions following a
string of accidents, including the collapse of a Bangladeshi
factory last year that killed more than 1,100 people.
Late last year, factory owners in Bangladesh agreed to a
minimum wage of $68 a month, up from $38.
Hennes & Mauritz, which buys about 80 percent of
its stock from Asia and is one of the biggest customers of
Bangladeshi garment factories, said rising wages in that country
and elsewhere were likely to hit profit margins.
"For purchases made now, wage increases in Bangladesh,
Cambodia and China have a negative effect because we are not
charging our customers higher prices," Chief Executive
Karl-Johan Persson told Reuters. "That will affect gross margins
negatively, all else equal, ahead."
H&M, which says it supports paying clothing workers a living
wage and has criticised governments for moving too slowly, has
recently been exploring options to buy garments from Africa.
But it is likely to remain heavily exposed to Asia for the
time being - moreso than bigger Spanish rival Inditex
which sources a greater proportion of products closer to home.
At 1205 GMT, H&M shares were down 4.1 percent at 277.90
Swedish crowns, one of the biggest falls by a European blue-chip
Both H&M and Inditex weathered the recent economic downturn
in Europe better than many clothing firms, thanks to their focus
on fast-changing fashions at affordable prices.
But competition has picked up, with discount rivals such as
Britain's Primark and U.S. group Forever 21 expanding
across Europe and online firms such as ASOS grabbing
market share, making it harder to pass on any extra costs.
H&M said pretax profit rose 8 percent to 3.5 billion Swedish
crowns ($542 million) in the three months ended Feb. 28, below
even the lowest estimate in a Reuters poll of analysts.
This was partly due to investments in IT and online - where
H&M went live in France this month - as it tries to recover from
a slow start in growing Internet sales.
Inditex, which owns the Zara chain, last week reported solid
annual results, helped by online sales and its greater exposure
than H&M to emerging markets.
Some analysts were disappointed by the 12 percent rise in
H&M's quarterly sales at local currencies, which continued at
rate level in March, and were concerned higher-than-expected
stock levels could lead it to cut prices in the months ahead.
"While part of this miss can be attributed to long-term
investments, we believe it is also indicative of weak
like-for-like sales performance and price investment, as the
company tries to compete in the fast-growing and increasingly
populous value apparel world," Bernstein analysts said of the
"Sales performance does not seem to have improved in March,
and the comps (comparative figures from last year) only get more
difficult in April and May. Furthermore, the high inventory
levels suggest H&M may see further margin pressure from
increased levels of markdown."
H&M's Persson said trading conditions remained difficult.
"Many still face a difficult economic situation in many
parts of Europe, even if it looks a bit brighter in places such
as Spain, Italy and Greece," he said. "Then, you have places
such as the U.S., where it has been very cold and also a bit
H&M's first-quarter gross profit margin fell to 54.9 percent
from 55.2 percent the same time a year earlier and against a
forecast for 55.3 percent. Inditex managed to keep gross margin
flat in the three months to end January at 57.9 percent.
H&M, which has almost 3,200 stores, about half that of
Inditex, is targeting Australia, the Philippines and India as
new markets this year and plans to roll out online services in
Spain, Italy and China.
It is also responding to competition by broadening its
product offering and rolling out new mid-market brands such as
COS and & Other Stories, which it said will open stores in
several new countries this year, including the United States.
The group also said it would roll out its well-received new
sports line to more stores and countries.
($1 = 6.4585 Swedish Crowns)
(Additional reporting by Emma Thomasson in Berlin; Editing by