Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Like the brief vogue for seventies suede, Hennes & Mauritz's first quarter looks like one to forget.

Profit before interest and tax fell 29 percent from a year earlier in the three months to the end of February to 3.27 billion krona ($400 million). This is partly because H&M has been hit hard by the strength of the dollar against the krona since the start of 2015.

As Gadfly has noted, retailers mostly pay for products from factories in China and south Asia in dollars, so a rising greenback lifts the cost of clothing made there. H&M is particularly exposed to this, as it sources about 80 percent of its stock from the region. That compares with about 35 percent at Inditex, the owner of the rival Zara brand, according to analysts at Bernstein.

H&M's Dollar Drubbing
Swedish krona's drop from the start of 2015 kicked up production costs and hurt recent profit numbers
Source: Bloomberg

Dollar strength was behind a reduction in the gross margin -- the difference between how much it costs retailers to manufacture and transport the goods to their stores and the price they sell them for -- to 52 percent in the first quarter compared with 55.2 percent a year ago. 

But the company says the pressure from the strong dollar is now easing, so by the final quarter of the year, the headwind should disappear altogether, or even become a slight tailwind. Investors liked the outlook and shares in H&M rose 10 percent.

It's worth remembering that there are still some clouds on H&M's horizon.

It's facing some serious structural problems. With the rise of value rivals such as Primark and Forever 21, H&M's cheap chic isn't quite as cheap, relatively speaking, as it used to be. 

In response, H&M has been investing heavily in its online sales and developing other brands, including & Other Stories and Cos, and said this would continue for many years to come. This is sensible given the competition it faces in the core value fashion sector. And H&M can afford it. It had cash of 12.95 billion krona at the end of its last financial year.

There are some early signs that this investment is paying off. H&M says online is profitable. Cos meanwhile is as profitable as the core H&M chain, while it reckons & Other Stories has started even better than Cos.

Deserved Discount
H&M's structural issues make it appropriate for it to trade at a discount to its main rival
Source: Bloomberg

But the company still has a ways to go. Its shares trade on about 20 times the next 12 months earnings, and its discount to Inditex's 27 times is justified, given its greater exposure to a hit from a strengthening dollar. 

The investment program may yet make a dent in this gap. It may help drive an expansion in the U.S., which could help offset the currency risks from its Asian exposure, in addition to driving a bigger sales gain all around.

But shareholders will need to see more of a pay-off from investments for that discount to close. 

Like one of its spirngtime flowered maxi dresses, it's cheap for a reason.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andrea Felsted in London at

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