* Pretax profit 3.7 bln crowns vs forecast 4.2 bln
* March 1-27 sales up 22 percent
* To open new line of stores next year
* Shares down 5 percent (Adds CEO quote, updates share)
By Simon Johnson and Veronica Ek
STOCKHOLM, March 29 (Reuters) - World number two clothes retailer H&M AB, which has built a reputation for cheap and cheerful fashion, set out plans for a new chain of stores as part of investments which held back its first quarterly profit growth in more than a year.
H&M, whose shares fell 5 percent, said on Thursday an independent line of stores would open in 2013 but gave no details on the market or price segment it would target.
"We have identified a possibility in the market and have a top team in place before the launch," H&M chief executive Karl-Johan Persson told Reuters after the group reported a rise in quarterly earnings below analysts' expectations.
The firm has struggled for more than a year with rising purchasing costs, a strong Swedish crown and an increase in wages in Asia and transport spending.
Unlike rivals such as Zara owner Inditex SA, H&M chose to hold down prices to gain market share, further hurting its gross margin. Persson said he was confident about his strategy, which includes a rash of new H&M store openings.
"We are making these long-term investments in order to build an even stronger H&M, so that we can give our customers an even broader offering," Persson said in a statement.
In the last few years, H&M has launched online sales, its HOME concept and the upmarket COS line of stores and has also bought the Monki and Cheap Monday brands. Persson denied that the new chain would go further upmarket than COS.
"We think that it is going to be very big. We see a huge potential," he said. The new stores would open in spring in a number of European countries. "We are also working on new concepts and new product categories," he said.
To drive sales, H&M has also teamed up with designers and celebrities, including Madonna and Karl Lagerfeld.
H&M plans 275 new stores this year, with China, the United States and the UK markets as the main focus.
It will add five new markets, including its first stores in Latin America, and will begin online sales in the United States.
Arch-rival Zara has more than twice the number of stores and an even wider range of offerings, something analysts say has helped it do better during the current downturn.
RETURN TO GROWTH
After profit slipped for five quarters in a row, H&M's earnings grew again in the December-February period, measured against a year earlier, thanks to strong sales.
But profit was lower than analysts had expected, with the company blaming higher purchasing costs - particularly cotton - and discounting to clear stock.
Pretax profit came in at 3.7 billion Swedish crowns ($554 million) for the fiscal first quarter versus a year-ago 3.5 billion and a mean forecast of 4.2 billion in a Reuters poll of 18 analysts.
H&M's gross margin came in at 55.8 percent, well below expectations of 57.6 percent and 57.8 a year ago.
"I had expected that we would begin to see a lift on the gross margin from sales growth this quarter, but clearly we will have to wait one more quarter for that," said Sydbank analyst Nicolaj Jeppesen.
Shares in H&M have outperformed the blue-chip Stockholm index with a rise of 12 percent since the start of 2012, but were down 5 percent in late trade.
The group said sales at the start of the year had been strong, despite the debt crisis and austerity measures across much of Europe, which is H&M's biggest market.
Inditex, the world's top clothing firm by sales, posted a rise in profit of 12.5 percent to 1.9 billion euros ($2.5 billion) in the year to end-January. ($1 = 6.6818 Swedish crowns) (Additional reporting by Rebecka Roos; Editing by David Cowell)
Start your workday the right way with the news that matters most. Learn more