STOCKHOLM (AP) -- Fashion retailer Hennes & Mauritz AB said Thursday that it had been hit by the high price of cotton as it reported a 5 percent increase in earnings for the first quarter on rising sales.
The profits came in below expectations and H&M's share price fell 5 percent in Stockholm to 238.10 Swedish kronor ($35.72) after the report.
Net profit was 2.74 billion kronor ($411 million) in the December 2011-February 2012 period, up from 2.62 billion kronor in the same period a year earlier.
Stockholm-based H&M said net sales rose to 27.8 billion kronor, from 24.5 billion kronor a year ago, and the increase continued in March.
However the retailer said its gross margin tightened to 55.8 percent, from 57.8 percent, in part because it kept prices stable despite higher purchasing costs.
"The increased purchasing costs are due partly to higher cotton prices at the time for sourcing for the quarter compared to the corresponding sourcing period the previous year, but also to our long-term investments aimed at broadening our total offering," H&M chief executive Karl-Johan Persson said.
He said the company plans to open a new chain next year that would build on the launch of H&M's upscale chain Collection of Style, or COS, in 2007.
"Like COS, which today is very successful with good profitability, the new chain of stores will be independent and complement the other offerings from the group," Persson said. "We have great faith in this new brand and we see considerable potential for further initiatives."
Meanwhile, the company opened its first store in Sofia, Bulgaria, this month, and plans to have opened other stores in Bulgaria, Latvia, Malaysia, Mexico and -- through a franchise -- Thailand by the end of the year.
The company, which has nearly 1,500 stores worldwide, stuck to its target of raising the number of stores by 10-15 percent this year.
The company's brands also include Monki, Weekday and Cheap Monday.