UPDATE 1-H&M warns of more markdowns after Q1 pretax plunges

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STOCKHOLM, March 27 (Reuters) - High inventories will carry price cuts into the second quarter, H&M warned on Tuesday, after the world's second largest clothing retailer reported a 61 percent plunge in first quarter profit hurt by price cutting.

Pretax profit for the three months to February 28 fell to 1.26 billion crowns ($154 million), just short of the 1.29 billion expected by analysts in a Reuters poll and boosted by a one-off positive tax income of 399 million euros related to U.S. tax reforms.

H&M shares were down 4.9 percent following the results.

The company had warned in February that markdowns due to weak demand in its main H&M brand stores would hit earnings. This month it reported that quarterly sales had fallen by 2 percent.

On Tuesday it said inventories had rise by a bigger-than-expected 7 percent in the first quarter due to expansion and weak sales.

This "will lead to increased markdowns in the second quarter" versus a year earlier, it said.

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

H&M shares have fallen over the past couple of years on slowing sales as it struggles to adapt to shoppers moving online.

H&M 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)