document: H&M Profit Misses Estimates as Retailer Absorbs Cost Rises -LRB- Adds comments from press conference in sixth paragraph . -RRB- March 31 -LRB- Bloomberg -RRB- - Hennes & Mauritz AB , the world 's second-largest clothing retailer , reported first-quarter profit that fell more than analysts anticipated as the company decided against passing on higher costs to customers . Net income dropped 30 percent to 2.62 billion kronor -LRB- $ 420 million -RRB- in the quarter ended Feb. 28 from 3.74 billion kronor from the year-earlier period , the Stockholm-based company said in a statement today . The average estimate of 13 analysts surveyed by Bloomberg was for profit of 2.77 billion kronor . The shares fell as much as 4.4 percent . H&M 's sales dropped 1 percent in the period while larger rival Inditex SA posted a 10 percent jump in its fourth quarter ended Jan. 31 . H&M , which buys its products from about 700 suppliers , has reduced prices for some items even as the price of cotton has traded near a record while some competitors have raised or maintained them . `` H&M is making a massive bet on market-share gains , '' Simon Irwin , an analyst at Liberum Capital in London , said by phone today . `` They 're cutting prices in an environment where their costs are rising and competition is increasing . '' H&M shares fell as much as 9.5 kronor to 207.10 kronor and traded at 208.40 kronor as of 12:01 p.m. . The stock has dropped 6.9 percent this year , compared with larger rival Inditex 's 0.7 percent advance . Inditex runs Zara stores . The Swedish retailer 's strategy to not pass on increased sourcing costs has served it well and the strategy is `` good in the longer term , '' H&M Chief Executive Officer Karl-Johan Persson said at a press conference today . Trench Coat H&M sells a trench coat on its U.K. Website for 34.99 pounds -LRB- $ 56.44 -RRB- , while Zara offers one for 79.99 pounds . Inditex , which also runs Massimo Dutti and Bershka stores , gets about 65 percent of its revenue from Zara . H&M sources two-thirds of its product from Asia . Inditex gets about 35 percent of its products from there and only half of that amount comes from China , where input costs are rising the fastest , said London-based Societe Generale analyst Anne Critchlow in an e-mail . `` H&M has chosen to reduce its prices in the current environment , which further hurts the gross margin , '' said Critchlow , who has a sell rating on the stock . `` Inditex says its prices are maintained . '' H&M 's gross margin in the first quarter was 57.8 percent , compared with 61.9 percent a year earlier . Sales in February rose by 9 percent in local currencies from the same month last year and advanced 3 percent between March 1 and March 29 . ` More Robust ' `` Inditex is much better-placed '' than H&M , said Irwin . `` Its top-line has been more robust , and given its mid-market positioning and proximity sourcing base it is less exposed to rising input prices . '' H&M also said today that the three months was `` characterized by continued restrained consumption , a discount - driven market with many price activities and unfavourable weather conditions , '' in December when it closed some stores temporarily amid heavy snowstorms . `` Sales have remained sluggish , which we think will raise concerns that H&M is confusing customers and pricing too close to discounters , '' said Bank of America Merrill Lynch analyst Richard Chamberlain in a note today . Inditex also plans to expand at about twice the pace of H&M , with a target of 500 new stores this year while H&M aims for 250 . Inditex said on March 23 that it opened 160 stores in Asia last year , of which 75 were in China 's main and smaller cities . The Spanish retailer plans to add a further 120 Chinese stores across its eight brands in 2011 . - With assistance by Janina Pfalzer in Stockholm . Editor : Celeste Perri , Paul Jarvis To contact the reporter on this story : Armorel Kenna in Milan at akenna@bloomberg.net To contact the editor responsible for this story : Celeste Perri at cperri@bloomberg.net .
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