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By Anna Ringstrom and Helena Soderpalm

STOCKHOLM, March 27 (Reuters) - H&M on Tuesday warned of further prices cuts to shift unsold clothes after the Swedish fashion retailer reported a 61 percent dive in first-quarter profit that knocked its shares.

The world's second largest clothes retailer said it would be forced into more discounting after seeing a bigger-than-expected 7 percent increase in inventories.

H&M shares were down 6.4 percent to 13-year lows at 1000 GMT.

The shares have fallen in recent years amid slowing sales hurt partly by shoppers moving online.

The company noted online sales rose by approximately 20 percent year on year.

"2018 is a transitional year for the H&M group, as we accelerate our transformation so that we can take advantage of the opportunities generated by rapid digitalisation," Chief Executive Karl-Johan Persson said.

Pretax profit for the three months through February fell to 1.26 billion crowns ($154 million), just short of the 1.29 billion expected by analysts in a Reuters poll.

Net profit of 1.37 billion crowns was boosted by a one-off positive tax income of 399 million crowns related to U.S. tax reform.

The company had warned already in February that markdowns due to weak demand in its main H&M brand stores would hit earnings, and this month said quarterly sales had fallen by 2 percent.

Markdowns in the second half of the year are likely to be lower compared to year-before levels, CEO Persson said on a conference call with analysts and media.

H&M stood by its full-year guidance for sales growth at its newer add-on brands and online of more than 25 percent, and a better group result than last year.

The outlook seems optimistic and inventory levels meant risks of further markdown pressure in coming quarters, said RBC analyst Richard Chamberlain, who holds an "underperform" rating on H&M.

"We are concerned that H&M is over-distributing and may be forced to cut its dividend this year or next if sales trends remain sluggish," he said.

Unusually, H&M, the world's second-biggest apparel retailer after Zara owner Inditex, did not provide a preliminary sales figure for the current month.

($1 = 8.1805 Swedish crowns) (Reporting by Anna Ringstrom and Helena Soderpalm; editing by Jason Neely)


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