STOCKHOLM Heavy investment in its online offering and new brands depressed fourth-quarter profits at Hennes & Mauritz (HMb.ST) and the world's No. 2 fashion retailer said it would keep expanding into more markets and products.
The Swedish budget fashion retailer said pre-tax profit rose 11 percent to 7.3 billion Swedish crowns ($1.13 billion), missing average analyst forecasts for 7.6 billion.
The gross margin, which had posted its first quarterly rise in three years in the third quarter, also disappointed, slipping to 60.8 percent from 61.6 percent, which H&M said was largely due to foreign exchange rate effects.
H&M, which had already reported quarterly sales, said it expected sales to rise 15 percent in January in local currencies after they rose 10 percent in December, the first month of its fiscal first quarter.
"Although there are still macro-economic challenges in several of our markets, we are optimistic about 2014 which will be an exciting year with new countries and new opportunities," Chief Executive Karl-Johan Persson said in a statement.
H&M, harder hit by the European downturn than its bigger rival Zara-owner Inditex (ITX.MC) which has more stores in emerging markets, said it expected to open 375 stores in 2014, including entering new markets Australia and the Philippines. The Swedish retailer has 3,100 stores in 53 countries.
H&M's shares were down 2.8 percent by 0806 GMT compared to a 0.6 percent weaker European retail index .SXRP and a 0.2 percent fall for Indiitex, taking them back to where they were trading after reporting a turnaround in margins in September.
"Our best guess today would be an in-line performance as the disappointing gross margin news nets off against the sales trends," said Anne Critchlow, a Societe Generale analyst.
As its margins are squeezed by the rapid expansion of discount brands like Britain's Primark (ABF.L) and Forever 21, H&M has been expanding mid-market brands "& Other Stories" and COS and introducing more premium products to its stores.
Fearing that online will cannibalize more profitable store sales, Inditex and H&M have been slow to embrace e-commerce, but are now expanding fast, with H&M online going live in August in the United States, where it is planning a high-profile advert at the Super Bowl on Sunday featuring soccer star David Beckham.
H&M will launch an online store in France in spring or summer plus in three further large markets later in 2014.
H&M proposed a dividend of 9.50 crowns per share, the same as the previous year.
($1 = 6.4650 Swedish crowns)
(Editing by Louise Ireland)