Hennes & Mauritz, the world's No.2 fashion retailer, missed quarterly earnings forecasts as it spent heavily on new ranges and websites in its battle with cut-price rivals, a drive it plans to extend in 2015 with a new beauty line.
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The Swedish company is investing in new concepts such as sportswear, designer collections and higher-price brands including COS to try to protect margins over the long term as discount chains Primark and Forever 21 push prices down.
In doing so, it is moving further into the territory of bigger rival Inditex, owner of the mid-market Zara brand, which is seen as less exposed to competition from budget chains and better positioned to benefit from booming e-commerce.
But the strategy comes at a price. H&M Chief Executive Karl-Johan Persson said on Wednesday long-term investment costs would rise 400-600 million Swedish crowns ($49-73 million) this year after an 850 million increase last year, as it launches websites in nine more markets and a new range of beauty products.
The company, which does not give a figure for total investments, said pretax profit for the three months ended November rose 7 percent to 7.80 billion crowns, missing analysts' average forecast of 7.96 billion, due in part to booking a staff incentive payout.
"These are disappointing results, as margins continue to decline," said Bernstein analyst Jamie Merriman, who rates the stock "underperform." "We expect continued margin compression."
H&M shares, which trade at almost 25 times forecast earnings to 29.4 for Inditex, were down 0.7 percent by 1050 GMT, underperforming a nearly flat European retail sector.
H&M, more exposed to sluggish European markets than Inditex, plans to add 400 stores to its current 3,511, mostly in China and the United States, while it will also enter Taiwan, Peru, Macau, South Africa and India and speed up expansion of upmarket brands including COS and "& Other Stories."
Persson told Reuters the company would probably expand with slightly more caution in Russia this year amid uncertainty due to a drop in the rouble -- at the same or a somewhat slower store opening pace than last year.
H&M currently has an online presence in just 13 of its 55 markets, compared with 27 for Inditex, with its Spanish rival seen as more likely to profit from e-commerce due to its higher-margin garments, slick supply chain and centralized logistics.
H&M said markdowns in its fiscal fourth quarter were lower than the year before, while it expects markdown levels to be roughly the same as a year ago in the first quarter.
However, cost inflation was higher in the fourth quarter, a trend H&M expects to continue in the first quarter, with a stronger dollar likely to increase sourcing costs throughout the year. H&M buys most of its clothes in dollars from Asia, while Zara sources more garments from Europe and North Africa.
H&M plans around a hundred new homewear departments and will launch a new range of make-up, body care and hair care in the autumn in around 900 stores and online.
It predicted a 14 percent rise in sales for January after a 15 percent increase in December, the start of its first quarter and proposed a dividend of 9.75 crowns, below a forecast 10.10 crowns.
($1 = 8.1869 Swedish crowns) (Writing by Emma Thomasson; Additional reporting by Helena Soderpalm; Editing by Alistair Scrutton and Mark Potter)