H&M reassures on pricing after profit slide

By Anna Ringstrom

STOCKHOLM (Reuters) - Shares in H&M rose on Thursday after the fashion retailer reassured investors that it would not need to cut costs further to shift unsold clothing despite a bigger than expected 20 percent fall in quarterly profit.

The Swedish company reported teething problems with a new logistics system designed to improve its supply chain but said it did not expected increased discounting in the current quarter because of what it called the "quality and balance" of its inventories.

Its shares traded 9 percent higher by 0730 GMT, having lost nearly two thirds of their value from record highs in 2015. Many in the market have bet on the shares falling, meaning any positive news tends to prompt a strong reaction.

H&M has seen profits shrink and inventories pile up over the past couple of years as its core budget chain has lost sales to low-price high-street rivals like Primark and online competitors such as ASOS and Zalando.

It has invested heavily in logistics and digitalisation and is reviewing its mix of stores and brands and is also working on a new H&M store concept.

"The rapid changes in the fashion industry are continuing and the H&M group is in an exciting transitional period," CEO Karl-Johan Persson said.

"Our transformation work has contributed to a gradual improvement in sales development with increased market share in most markets during the third quarter."

However, June-August pretax profit for the sector's second-biggest after Zara owner Inditex shrank 20 percent from a year ago to 4.01 billion crowns ($454 million) against a Reuters poll forecast for a 16 percent drop.

MIXED BAG

Markdowns increased by 0.7 percentage points, and inventories 15 percent to 38.7 billion crowns or 19 percent of sales in the period, the third quarter of its financial year.

RBC analyst Richard Chamberlain saw the earnings as a mixed bag.

"We still see the risk to consensus estimates as on the downside, however H&M is working its way through some of its issues and has given more reassuring guidance on markdowns for Q4, expected at this stage to be flat yoy (year-on-year)," said Chamberlain, who has a "Neutral" rating on the stock.

H&M is rolling out a new logistics system to make its supply chain faster and more efficient and better integrate its more than 4,700 stores with its website.

Problems with the new logistics system in the United States, France, Italy and Belgium led to extra costs of around 400 million crowns and a sales drop of 8 percent in those markets.

However, overall sales for its other 66 markets increased by 8 percent in local currencies during the quarter.

H&M had on Sept. 17 posted estimate-beating quarterly local-currency sales growth of 4 percent, after unchanged sales in the second quarter and declines in the previous two, but warned that the logistics problems would hit profits.

($1 = 8.8315 Swedish crowns)

(Reporting by Anna Ringstrom; Editing by Keith Weir)