UPDATE 3-H&M's Q3 hurt by gloomy economy, shares dive

(Adds company, fresh analyst comment, updates shares)

By Veronica Ek and Simon Johnson

STOCKHOLM, Sept 30 (Reuters) - Shares in Hennes & Mauritz (HMb.ST) tumbled more than 11 percent on Tuesday after the fashion giant reported lower-than-expected third quarter pretax profit as gathering consumer gloom hurt sales and margins.

The world's third-biggest clothing retailer by sales, made a pretax profit of 4.59 billion crowns ($680 million) in the period, up from 4.4 billion in the same period last year.

But it undershot the average forecast of 5.03 billion in a Reuters poll of analysts.

Sales totalled 20.87 billion crowns against an average forecast of 20.97 billion, and the gross margin dipped 0.4 percentage points on a year ago to 60.8 percent.

"It is weak on most points and it's the gross margin that stands out most," said Andreas Lundberg, an analyst at Handelsbanken.

Financial turmoil has hit retailers as shoppers cut spending in the face of higher fuel costs, inflation and slumping asset prices. Official data for the euro zone show retail sales fell in June and July. The annual fall in June was a record.

H&M said the fall in its gross margin was due to steeper price cuts than last year. Investor Relations head Nils Vinge said this had cut the gross margin by around 1 percentage point.

H&M shares fell as much as 11.4 pct -- the largest intraday drop since September 2002 -- and were down 9.6 percent at 1004 GMT. Shares in rival Zara-owner Inditex (ITX.MC) were flat.

THE CHEAPER THE BETTER

The two rivals have generally fared better than independents in the financial downturn as they appeal to the high-fashion but price-conscious consumer and Chief Executive Rolf Eriksen said H&M continued to take market share in a number of countries.

Earlier this month, Inditex reported a 3 percent rise in net profit for the first half of the year and said it saw no significant risks or uncertainties in the second half.

H&M said its sales in September rose 9 percent up to the 28th of the month. Sales in August were up 8 percent against an expected 13.4 percent rise, with turnover in stores open a year or more down 3 percent.

H&M only gives whole numbers for the percentage change in sales and does not provide a currency figure.

"The sales development in September points to the fact that despite the results disappointment we only need to reduce our earnings estimates for 2008 by about 1 percent," Danish bank Jyske said in a note. "Therefore we see today's share price reaction as a definite overreaction."

H&M said it would continue expanding despite the current market conditions and it plans to open a net 114 new stores in the fourth quarter.

It said the opening of its first store in Japan had gone well and it had signed deals for another three stores in Tokyo.

"We had high expectations for Japan," Eriksen said. "To say that they have been exceeded would not be an exaggeration. We have never had such a response for a shop-opening."

The company also said it stuck by plans to launch its twice-delayed textile venture H&M Home at the turn of the year.

"Looking forward I still think H&M will stand stronger than their peers thanks to their low price," said Sydbank analyst Soren Hansen. "Looking at their expanding strategy it looks as if their business is still going strong." (Editing by Greg Mahlich, Sue Thomas and Hans Peters)