June 22 - Swedish cheap-and-chic fashion giant H&M posted a net profit down 18 percent from a year ago and said it was facing challenging conditions in both its sourcing and sale markets.

A H&M - Store in Manhattan - photo: corbis

The company's net profit was down to 4.26 billion kroner (465 million euros, $670 million) from 5.21 billion for the same period in 2010.

The figure slightly beat the expectations of analysts surveyed by Dow Jones Newswires, who expected a net profit of 4.22 billion.

Translated into Swedish kroner and excluding value-added tax (VAT), its sales were almost flat, at 27.6 billion, compared to 27.0 billion a year earlier. In local currencies and including VAT, they grew 12 percent.

Chief executive Karl-Johan Persson praised a gain in market share "in a very challenging market," while noting the economy had negatively affected the retail sector.

"Increasing interest rates, higher energy prices and austerity measures in many economies have decreased consumer spending power. During the spring, the fashion retail industry has been characterised by many price campaigns and special offers," he said.

He added H&M was positive for the future "despite challenging conditions both in the sales market and in the sourcing markets."

The company said that similarly to the first quarter, it decided to not pass onto customers higher costs -- caused notably by higher cotton prices, higher transport costs and a negative US dollar effect -- keeping its prices low in order to secure its spot in the market.

"H&M chose to strengthen its price position in order to build further on its strong market position in the long term," it explained.

Known for its trendy yet affordable fashions, H&M is the world's third largest clothing group behind Spain's Inditex, which owns Zara, and Gap of the United States.

The company was founded in Vaesteraas in central Sweden in 1947. As of May 31 this year, it had 2,297 H&M stores. The H&M group also has 39 stores under its COS banner, 48 Monki stores, 18 Weekday stores and one under the Cheap Monday banner.