* Pretax profit 7.18 bln SEK vs consensus f'cast 8.17 bln
* Gross margin 63.2 percent vs f'cast 63.7 bln
* Says cotton prices doubled in 2010
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By Anna Ringstrom
STOCKHOLM, Jan 27 (Reuters) - Hennes & Mauritz AB posted a surprise fall in pretax profit on Thursday as the Swedish budget fashion giant cut prices despite rising cost pressures and said markdowns would continue.
Gross margin at H&M, the world's third-biggest clothing retailer by sales, shrank slightly more than expected to 63.2 percent from a year-earlier 66.3 percent. This was against a mean forecast of 63.7 percent in a Reuters poll of analysts.
The weak fourth-quarter results add to concerns that rising prices of raw materials such as cotton will have a significant negative impact, particularly on budget clothing chains.
Retailers around the world worry whether they can pass on rising costs to customers at a time when households are being hit by austerity measures imposed by governments trying to rein in deficits.
"The factors affecting (the quarter) were less spare capacity at the suppliers, higher transportation costs and significantly higher raw material prices, eg the cotton prices almost doubled in 2010," H&M said.
"Increased investments in the customer offering in order to strengthen H&M's market position also had a negative effect on the gross margin," it said, adding markdowns in the quarter were at the same level as in the year-earlier period.
Quarterly pretax profit at H&M, whose fiscal year runs through November and which competes with companies including Spain's Inditex, fell to 7.18 billion crowns ($1.1 billion) from 7.99 billion, against a consensus 8.17 billion forecast.
"The company estimates that markdowns in relation to sales during the first quarter of 2011 will be on the same level as in the first quarter 2010," it said.
SG Securities analyst Anne Critchlow said: "It does beg the question what the gross margin is going to be like next year (fiscal 2010-11). The answer is worse than consensus.
"Current trading looks fairly lacklustre," Critchlow added, noting sales data for December and January looked fairly weak against a reviving economy in Germany, H&M's biggest market. (Additional reporting by Mark Potter; Editing by David Holmes) ($1=6.447 Swedish Crown)