(Corrects typographical error in fifth paragraph)
* Inditex could reverse share price discount to H&M
* Inditex, H&M to retain premiums to other clothing stocks
* European clothing market to shrink in 2009
By Mark Potter
LONDON, March 26 (Reuters) - Inditex, Europe's No.1 fashion retailer, could reverse its share price discount to rival H&M after results this week underscored its resilience and lower exposure to the firmer U.S. dollar.
Shares in Inditex, whose chains include Zara and Massimo Dutti, have underperformed Sweden's Hennes & Maurtiz (H&M) by about 12 percent this year, even accounting for a rebound in its stock on Wednesday and a drop in H&M's shares on Thursday.
Much of this weakness has been driven by concerns over Inditex's home market of Spain, which accounts for about a third of its sales and has been hit by a plunge in consumer spending.
But Inditex, which has more than 4,000 stores in 73 countries, beat forecasts on Wednesday with flat 2008 net profit of 1.25 billion euros ($1.7 billion) and cheered investors with an upbeat outlook.
In contrast, some analysts fear H&M's main market of Germany, which until now has held up well, may weaken.
"We fear that the downturn in Germany could be lagging the rest of Europe," Carnegie analyst Niklas Ekman said in a recent research note, arguing declines in industrial output, a key part of the German economy, could herald a broader slowdown.
Inditex also has less exposure to the stronger dollar as it buys only about a third of products in Asia, where purchases are made in the U.S. currency, compared with more than half for H&M.
H&M, which has over 1,700 stores in 34 countries, blamed unfavourable currency moves on Thursday as it posted a surprise 13 percent fall in first-quarter profit to 3.55 billion Swedish crowns ($440 million).
"(Inditex's) discount to peers, H&M in particular, now looks very overplayed," said HSBC analyst Paul Smiddy, upgrading his rating on the Spanish stock to "overweight" from "neutral."
TOUGH TIMES
Europe's fashion chains are being hit hard in a global downturn as shoppers cut spending on non-essential items.
Clothing and footwear sales in western Europe rose just 0.3 percent to 221 billion euros ($300 billion) in 2008 and are forecast to decline in 2009, possibly by a double-digit percentage, according to researcher Euromonitor International.
Inditex and H&M are both feeling the pain, signalling this week that same-store sales had fallen recently.
But they are also both still planning for underlying sales increases this year and analysts think they will fare better than smaller rivals because of their focus on selling fashion styles taken from the catwalks at knock-down prices and also because of their geographic diversity.
Both stocks trade at a premium to the DJ Stoxx European retail index average of 12.1 times forecast earnings, with Inditex on 14 and H&M on 16.7, according to Reuters data.
Some say the premium is not big enough.
Citi analysts, for example, note that Inditex is trading at its lowest ever premium to UK retailers and say this is unjustified given the weakness of the British market.
Mid-market British clothing retailer Next said on Thursday it expected underlying first-half sales at its shops to fall by between 6 and 9 percent.
Sanford Bernstein's Luca Solca agrees both Inditex and H&M should outperform, but he thinks Inditex has an advantage with a slightly more upmarket position that could allow it to capture consumers trading down from high-end fashion lines, while H&M could be left competing with discounters like Primark.
He also thinks Inditex has an advantage with a broader appeal to customers through its eight brands, including promising signs from its recent accessories store Uterque.
"Inditex at the moment seems a) the stronger retailer and b) better placed to weather 2009 than H&M does," said Jon Wright, industry manager for retailing at Euromonitor International. (Additional reporting by Anna Ringstrom in Stockholm and Sonya Dowsett in Madrid; Editing by Erica Billingham)