HENNES AND MAURITZ AB, Europe’s second-largest clothing retailer, reported a fifth consecutive drop in quarterly profit as the cost of making garments increased and the company stepped up discounting.

Net income slipped 2.4 per cent to 5.36 billion kronor (€602 million) in the three months ended November 30th, Stockholm-based H&M said in a statement.

HM said the macroeconomic climate will remain “tough” in many markets during 2012. Higher labour costs in Asia weighed on profit at the company, which described the situation in markets it sources from as “challenging”.

Profitability was affected by record cotton prices in the first half of last year and increased discounting, according to Anne Critchlow, an analyst at Société Générale in London.

“H&M has strengthened its price position over the past 18 months, which has reduced the gross margin,” Ms Critchlow said.

The number of markdowns in the first quarter of this year will be higher than a year earlier because of an increase in inventory, the retailer said.

H&M doesn’t envisage big changes to sourcing in Asia, chief executive officer Karl-Johan Persson said at a press conference in Stockholm.

The company obtains about 75 per cent of products from the region, compared with 35 per cent for Inditex.

Pretax profit fell 5.2 per cent to 6.8 billion kronor. Revenue at stores open at least a year has risen about 3 per cent so far in January, Ms Critchlow said.

H&M plans to open 275 stores this year and sees expansion prospects in France, Italy and Germany, its biggest market.

The retailer will open in Mexico and start US online sales in the autumn.

It opened 266 stores last year, bringing the total to about 2,500.

The expansion was led by China, where the company opened 35 stores, and it will add more than that this year, finance director Nils Vinge said in a conference call. – (Bloomberg)