Inditex, the owner of the Zara chain, said on Wednesday that profitability shrank to an eight-year low. Main rival Hennes & Mauritz reported the first monthly sales drop in almost four years. Shares of both retailers sank.

The reports illustrate the difficulties facing the fashion industry as consumers divert spending to leisure activities and buy more of their apparel from a rising number of online suppliers. The increased competition is putting pressure on prices, while higher production costs are also squeezing profitability.

"In February, industry data was very challenging," Richard Chamberlain, an analyst at RBC Capital, said in a note. Sales declines of 9 per cent in Germany and 6 per cent in Sweden reflect "some spend rotation into other consumer categories."

H&M shares fell as much as 5.1 per cent in Stockholm, the most in three months. A 1 per cent drop in February sales was caused by the month having one day fewer than in the leap year of 2016. Adjusting for that, revenue rose 3 per cent in local currencies, missing estimates.

Chamberlain estimates that H&M's same-store sales fell 3 per cent in the month, weighed down by the tough industry conditions and as initiatives to expand online options for customers and improve methods of supply take time to feed through to sales.

In Zara's shadow

H&M has been in the shadow of faster-growing competitor Inditex in recent years, though Wednesday's results from the Zara owner suggest it too is finding life more difficult.

Inditex's gross margin narrowed to 57 per cent from 57.8 per cent in the 12 months through January, missing the Spanish retailer's goal to keep the measure within 0.5 percentage points of the previous year.

The shares fell as much as 2.7 per cent, the most since December, though pared their losses after CEO Pablo Isla said that at current exchange rates, profitability won't fall this year.

Inditex said the decline in last year's gross margin was due to currency swings. Foreign exchange stripped 3 percentage points off sales growth. Weaker currencies in Russia, China and Mexico reduce the value of sales in those markets when translated into euros.

Bloomberg