H&M shares slip after quarterly sales rise fails to reassure

By Anna Ringstrom

STOCKHOLM (Reuters) - Shares in Sweden's H&M, the world's second-biggest fashion retailer, slipped on Friday after quarterly local-currency sales growth matched forecasts but failed to allay longer-term market concerns over margins and inventory.

H&M has seen profits shrink and inventories bank up in recent years as footfall slowed at its core-brand stores in the face of a shift online and mounting competition, while the firm has struggled to react quickly enough to demand swings.

It is investing heavily in logistics, digital technology, online offering and store concepts, and is reviewing its mix of stores and brands.

Local-currency sales rose for a third straight quarter in the December-February period, climbing 4 percent from a year earlier, in line with the mean forecast in a Reuters poll of analysts.

H&M, whose main rival is market leader Inditex, said in a statement net sales were up 10 percent to 51.0 billion crowns (4.2 billion pounds), versus expectations for an 8 percent rise.

Shares however were down 4.6 percent at 0957 GMT, taking them back to their lowest in two days after they climbed over the past week.

"We think H&M is making progress on its recovery. However some expectations were for a stronger performance in February," said RBC analyst Richard Chamberlain, who recently raised his rating on the stock to "sector perform".

Chamberlain estimated there was a "very small" sales increase in stores open a year or more.

H&M, which is due to publish its full first-quarter earnings report on March 29, did not comment on the sales figures.

The company's investments to boost sales have taken their toll on profitability, and many analysts are unconvinced the company is yet back on track.

"H&M's commercial initiative of incentivising customers to switch to its online offering - given free deliveries and returns - should be inherently growth-accretive, but at the same time heavily margin-dilutive," said Jefferies analysts with a "hold" rating on the stock.

"Given this backdrop, while H&M's sales trends look more supportive, they need to be weighed against the full earnings picture. We expect Q1 results on March 29 to confirm ongoing, heavy margin declines," they said in a note.

Inditex, which owns Zara, has outperformed rivals for years but investors have started to fret about slowing sales growth at the group.

H&M said in January it saw less need in the first quarter than a year earlier to cut prices to shift unsold clothes.

"We expect inventories to remain high but for the composition to be improving gradually, with a higher amount of fresh garments in the mix," RBC's Chamberlain said on the first quarter.

H&M's shares trade at 19.5 times full-year earnings, against 22.5 times earnings for Inditex.

(Reporting by Anna Ringstrom; Editing by Edmund Blair and Jan Harvey)