Price cuts to clear summer stock fray H&M margins

STOCKHOLM (Reuters) - Fashion retailer H&M reported a 20 percent fall in quarterly profit on Thursday as summer discounts hurt margins, while sales slowed towards the end of this month.

The world's second-biggest fashion retailer after Zara owner Inditex has been struggling to keep up with rapid changes to its retail market as competition intensifies and young shoppers move online.

Pretax profit for the three months to Aug. 31 fell 20 percent to 5.02 billion Swedish crowns ($614 million). Analysts had expected a fall of 21 percent, according to a Reuters poll.

Shares in H&M were down 4.6 percent at 0710 GMT, taking a year-to-date fall to 15.8 percent.

"The fashion retail sector is growing and is in a period of extensive and rapid change as a result of ongoing digitalisation," CEO Karl-Johan Persson said in a statement.

"Our growing online sales did not fully compensate for reduced footfall to stores in several of our established markets, which has resulted in our total sales development not reaching our targets so far this year."

The company has said this month that markdowns to shift piled-up unsold garments were much larger than usual, and it said on Thursday its gross margin shrank to 51.4 percent from 54.0 percent.

Markdowns in relation to sales grew 2.8 percentage points.

However, despite the extra effort to clear the shelves ahead of autumn, inventories were up 8 percent at the end of the quarter.

H&M said it saw great potential to achieve lower inventory levels in future thanks to faster lead times for fashion items, more efficient supply chains and more in-season purchases.

The firm said that after a good start, sales in September had somewhat towards the end of the month. It did not, as it usually does, provide a preliminary sales figure.

It said it now planned a net increase of stores in the year of 385, down from previous guidance for around 400.

$1 = 8.1689 Swedish crowns)

(Reporting by Anna Ringstrom; editing by Niklas Pollard/Keith Weir)