H&M falls out of fashion as sales lag in first quarter.

STOCKHOLM, March 15, 2010 (FBC) – H&M (HMb.ST), the world’s second-largest fashion retailer, reported on Wednesday a smaller-than-expected increase in sales in the December-February period. Compete with Zara-owner Inditex.

H&M shares were down 6% in early trade, underperforming the broader Swedish market (.OMXSPI). They have increased by 12 percent year-on-year.

The Swedish group’s sales, measured in local currencies for the period, rose 3 percent from a year earlier in the fiscal first quarter.

Jefferies analysts said local currency sales, the most widely watched figure in markets, were significantly weaker than consensus estimates and actual sales fell 3 percent in February.

H&M’s net sales rose 12 percent to 54.9 billion crowns ($5.26 billion) from a year earlier.

Excluding Belarus, Russia and Ukraine, the increase in net sales was 16%, and in local currencies, 7%, the company said in its statement.

Budget player H&M’s profits fell last year as it failed to fully absorb rising raw material, freight and energy costs in a bid to retain its price-conscious customers.

In contrast, market leader Inditex ( ITX.MC ) reported on Wednesday a 13.5% rise in sales for the February 1-March 13 period and a 27% rise in net profit for the fiscal year to January.

Analysts said demand for Zara’s clothing has continued even after a 5% or more price hike last year.

H&M, which is in the midst of a program to cut staff and other costs, will publish its full quarterly report on March 31.

Reporting by Marie Manns, Editing by Anna Ringstrom and Barbara Lewis

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