By Anna Ringstrom
STOCKHOLM (Reuters) - Shares in H&M <HMb.ST> rose more than 10 percent on Thursday after the fashion retailer reassured investors that it would not need to cut costs further to shift unsold clothing despite a bigger than expected fall in quarterly profit.
The Swedish company felt the effects of teething problems with a new logistics system designed to help improve its supply chain that cost it an additional 400 million Swedish crowns (34 million pounds).
However, the market reacted positively after H&M said it did not expect increased discounting in the current quarter thanks to the "quality and balance" of its inventories.
Its shares traded 10.6 percent higher by 0955 GMT, having lost nearly two thirds of their value from record highs in 2015. Many in the market have bet on the shares falling, meaning any positive news tends to prompt a strong reaction.
In September, the first month of H&M's fourth quarter, the underlying sales trend was positive, CEO Karl-Johan Persson said on a call with analysts.
Persson said the logistics problems would affect costs and sales in the fourth quarter but to a lesser extent.
H&M has seen profits shrink and inventories pile up over the past couple of years as its core budget chain has lost sales to low-price high-street rivals like Primark and online competitors such as ASOS <ASOS.L> and Zalando <ZALG.DE>.
H&M has invested heavily in logistics and digitalisation and is reviewing its mix of stores and brands and is also working on a new H&M store concept.
However, June-August pretax profit for the second-biggest clothing retailer after Zara owner Inditex <ITX.MC> shrank 20 percent from a year ago to 4.01 billion crowns ($454 million) against a Reuters poll forecast for a 16 percent drop.
British online rival Boohoo <BOOH.L> this week reported forecast-beating profit growth for the first half of the year and raised its sales guidance. Britain's Next <NXT.L> raised its profit guidance after better-than-expected trading in late summer.
H&M is rolling out a new logistics system to make its supply chain faster and more efficient and better integrate its more than 4,700 stores with its website.
Problems with the new system in the United States, France, Italy and Belgium led to extra costs and a sales drop of 8 percent in those markets.
However, overall sales for its other 66 markets increased by 8 percent in local currencies during the quarter.
Analysts at Credit Suisse said that meant comparable sales in those markets may well have been up for the first time in three years.
Markdowns increased by 0.7 percentage points, and inventories 15 percent to 38.7 billion crowns or 19 percent of sales in the period, the third quarter of its financial year.
H&M said its online sales soared 32 percent in the third quarter.
RBC analyst Richard Chamberlain saw the earnings as a mixed bag.
"We still see the risk to consensus estimates as on the downside, however H&M is working its way through some of its issues and has given more reassuring guidance on markdowns for Q4, expected at this stage to be flat yoy (year-on-year)," said Chamberlain, who has a "Neutral" rating on the stock.
(Additonal reporting by Emma Thomasson; Editing by Keith Weir)