Hennes & Mauritz, the world’s second-biggest fashion retailer, warned on Thursday of a “very negative” impact from higher purchasing costs for the rest of the year due to the strong US dollar, which also dented second-quarter profits.

H&M, which sources 80 per cent of its clothes in Asia in contracts denominated in dollars while selling most of them in Europe, said external factors such as raw material prices, cost inflation, capacity at suppliers, purchasing currencies and transportation costs all had a negative effect in the last three months.

It said the situation could be even worse for its third and fourth quarters due to the rise in the US dollar.

Unlike H&M, its bigger rival Inditex, owner of the Zara chain, produces its garments itself and sources more in Europe than H&M.

H&M also said on Thursday the pace of long-term investments it is making in areas like ecommerce and new store concepts, which will be higher in 2015 than 2014, could run unevenly over the remaining quarters.

“Although these long-term investments currently involve costs, we see them as necessary in order to build an even stronger H&M,” chief executive Karl-Johan Persson said in a statement.

H&M’s shares were down 2.5 per cent at 331.70 crowns in early trading, making them the biggest loser in the Stoxx Europe 600 retail sector index, which was down 0.7 per cent.

"We expect continued margin contraction in the remainder of 2015," said Bernstein analyst Jamie Merriman.

H&M said its gross margin for its March-May second quarter fell to 59.4 per cent from 60.8 per cent a year ago, missing the average of forecasts given by analysts in a Reuters poll of 59.9 percent. Inditex saw the gross margin for its first quarter ended April 30th rise to 59.4 per cent from 58.9 per cent a year ago.

Unusually cold spring weather in many of the company’s important European markets and calendar effects also had a negative impact, H&M said.

The company said pretax profit in the second quarter rose to 8.44 billion Swedish crowns from 7.64 billion in the same period last year, just short of the average forecast by analysts of 8.48 billion.

H&M, which has the bulk of its business in Europe, with Germany its biggest single market, said that so far in June, the first month of its third quarter, sales were up 14 per cent in local currencies from a year ago.

H&M said markdowns in the quarter in relation to sales increased by 0.3 percentage points compared to a year ago.

H&M shares are up about 4 per cent this year, underperforming Inditex, which is up 29 per cent. Its stock is trading at 24 times 12-month forward earnings, a discount to Inditex which trades at 31 times forward earnings.

Reuters