June 22, 2016 / 8:57 AM / in a year

UPDATE 2-H&M caught out by cold spring weather and strong dollar

* Q2 pretax profit down 17 pct, meets analyst consensus

* Shares down 0.4 pct, widening discount to Inditex

* Impact of strong dollar set to persist

* High inventories likely to mean more markdowns (Adds details, background)

By Anna Ringstrom

STOCKHOLM, June 22 (Reuters) - Profit at Swedish fashion retailer Hennes & Mauritz fell 17 percent in the second quarter as cold weather hit sales of its spring clothes and a strong dollar increased its costs.

H&M, which buys the bulk of its clothes in Asia on U.S. dollar contracts while selling most of them in Europe, is more exposed to the U.S. currency than Zara owner Inditex which makes more in-house, either in or near Europe.

A strong dollar will have a negative impact on purchasing costs for the third quarter and a neutral effect in the fourth, H&M said on Wednesday. It had previously said the impact could be slightly positive by then.

H&M, which is also facing intensified competition in budget clothing from players such as ABF’s Primark, said higher markdowns were mainly due to spring garments not selling as well as planned because of unseasonably cold weather in key markets.

Pretax profit at H&M from March to May fell to 7.0 billion Swedish crowns ($847 million), in line with a Reuters poll of analysts but underperforming Inditex which last week beat forecasts with a 6 percent rise in profit for February to April as fast turnover helped it react to the weather.

Shares in H&M, which are down 17 percent this year, were off 0.44 percent by 0820 GMT, further widening their discount to Inditex to trade on 19.5 times forward earnings, compared to 28 times for the Spanish firm.

H&M said the weak demand, mainly in March and April, had contributed to higher inventories than expected as it entered its third quarter, which analysts said could mean more weakness.

“That implies further markdowns to come, which should in turn put pressure on the third-quarter gross margin,” said Societe Generale analyst Anne Critchlow.

H&M’s gross margin shrank to 57.6 percent in the second quarter from 59.4 percent.

Sales between June 1 and June 21 were up 7 percent in local currencies, H&M said. This was slightly slower than the 9 percent it saw in May and well below the 15 percent Inditex reported at constant exchange rates for May 1 to June 13.

H&M, which has also seen profitability dented by heavy investment in ecommerce, said it planned to go online in Canada and South Korea later this year and continue a fast roll-out in 2017, while also opening stores in four to five new countries, including Colombia. ($1 = 8.2610 Swedish crowns) (Editing by Emma Thomasson and Alexander Smith)

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