H&M's profit dives again as logistics issues take toll

STOCKHOLM (Reuters) - Fashion retailer H&M reported a bigger than expected 20 percent fall in quarterly profit as a new logistics system suffered teething troubles and inventories of unsold stock grew.

Sweden's H&M has seen profits shrink and inventories pile up over the past couple of years as its core budget H&M 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.

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.

H&M however said the quality and balance of its inventories were now better than a year ago and it therefore expected markdowns not to grow in the fourth quarter on an annual basis.

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.

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.

H&M's shares have lost nearly two thirds of their value since record highs in 2015.

($1 = 8.8315 Swedish crowns)

(Reporting by Anna Ringstrom)