UPDATE 2-Further pain for H&M as quarterly sales miss lowered forecasts

* Q1 sales unchanged in local currencies

* Q1 result means February sales deteriorated

* Market expectations were for 1.2 pct increase

* Shares fall 5 pct (Adds detail, background, shares)

STOCKHOLM, March 15 (Reuters) - Sweden’s H&M reported slowing sales in February, below analyst forecasts, having warned last month that its main budget fashion brand was having to cut prices to shift stock.

As H&M had already announced its sales for December-January rose 1 percent, flat sales in local currencies for the quarter to end-February signalled fresh weakness. A Reuters poll mean forecast was for a 1.2 percent increase.

H&M shares fell as much as 5.1 percent in early trading, having lost 44 percent over the past year to be trading at 10-year lows.

After decades of rapid expansion growing to 4,743 stores, the world’s second-largest clothes retailer behind Zara owner Inditex has seen sales growth stall in recent years as it has struggled to adapt to the shift online and fend off increased competition from other budget brands.

While Inditex has invested in technology to merge online and store experiences, for example radio frequency identification devices (RFID) on clothing that allow it to keep a tight control on inventory and notify customers if items are available at nearby stores, H&M has lagged.

Inditex also has a more flexible supply chain, enabling in-store deliveries and returns of online orders that its Swedish rival has been slower to introduce.

Inditex on Wednesday posted a 7 percent profit rise in its fiscal year through January and said sales grew 9 percent in the first five weeks of its new financial year. Its shares are down 19 percent in the last 12 months.


H&M warned in February, at its first-ever capital markets day, that markdowns due to high inventories would hit earnings at the start of the year. It said it hadn’t got its product ranges right.

The company, whose brands include Cos, Weekday and Cheap Monday as well as its main H&M stores, is due to publish its full fiscal first-quarter earnings report on March 23.

H&M said in February it was expecting a gradual improvement in underlying sales throughout the year.

“We think the spring fashion season has got off to a tough start, not helped by very cold temperatures in late February and early March in major European markets,” RBC Capital Markets said in a note, adding it will put downward pressure on consensus earnings forecasts for Q1 and the full year.

H&M CEO Karl-Johan Persson said in February his priority was to get the core budget H&M brand back on track. It accounts for the bulk of sales but visitors to its stores have dwindled.

Analysts said, having seen like-for-like sales slow and shares tumble over the last couple of years, he has not yet convinced them he has a viable plan to turn around the weak trend in its core brand.

“Most important is to develop the range which we haven’t improved enough, to lift the store experience to a new level - there we haven’t improved enough - and to develop the online store and connect the channels,” Persson told Reuters last month.

Sales excluding VAT fell to 46.2 billion Swedish crowns ($5.65 billion) from 47.0 billion a year ago, versus expectations of 47.3 billion.

$1 = 8.1813 Swedish crowns Reporting by Helena Soderpalm; additional reporting by Johannes Hellstrom, Editing by Elaine Hardcastle