Hennes and Mauritz (H&M), Europe's second-biggest clothing retailer, says the cost of investing in online expansion weighed on first-quarter earnings as it seeks to keep up with the pace of change in the industry.

Operating profit rose 8.7 per cent to 3.4 billion Swedish kronor, although the increase would have been 14 per cent without the cost of long-term investments, the company said in a statement yesterday. Net income rose 7.8 per cent to 2.65 billion kronor, undershooting analyst estimates. H&M shares fell as much as 4.9 per cent.

“The operating cost grew more than everyone expected,” Anne Critchlow, an analyst at Société Générale in London, said. The increase was due to investment in online as well as H&M’s COS and Other Stories store formats, she said.

The retailer is ramping up its online business and introducing new store concepts to close the gap with bigger Zara-owned In ditex and combat increased com petition from online retailers such as Asos, and budget chains including Primark/Penneys.

Costs in 2014 will be higher than last year, the company also said. Costs for online, information technology and new concepts will weigh on this year’s results by an additional 600 million to 800 million kronor compared with a year earlier, Nils Vinge, head of investor relations, said.

“It’s great that H&M is diversifying away from the price competition in the core concept, so there is no issue with that over the longer term, but those costs disproportionally hit the first quarter,” Ms Critchlow said.

Profit growth in the quarter was also stinted by a narrower gross margin as discounts in relation to sales increased from a year earlier. The profitability gauge narrowed to 54.9 per cent from 55.2 per cent a year earlier.

Sales at constant rates of exchange have risen 12 per cent so far this month, H&M said, matching first-quarter pace. The March figure implies growth of about 2 per cent on a like-for-like basis, according to Ms Critchlow.

“Overall, these are a disappointing set of results,” Jamie Merriman, an analyst at Sanford C. Bernstein in London, said in a note. “While part of this miss can be attributed to long-term investments, we believe it is also indicative of weak like-for-like sales performance and price investment, as the company tries to compete in the fast-growing and increasingly populous value-apparel world.” – (Bloomberg)