stockpile@ (Adds details on continuing supply disruptions, short positions, analyst quote, CEO comment)
STOCKHOLM, June 28 (Reuters) - H&M plans to cut prices further as supply problems hamper the Swedish company's ability to respond to fast-changing fashion demand, swelling its stockpiles of unsold clothing.
The world's second-biggest fashion retailer after Inditex on Thursday reported a further drop in profit for the quarter to the end of May and said it would now be tougher to reach its target of a "somewhat better" result for 2018.
"The first half of the year has been somewhat more challenging than we initially thought, but we believe that there is a gradual improvement and that we will see a stronger second half," Chief Executive Karl-Johan Persson said.
However he told analysts that supply disruptions would continue to hurt its sales in the third quarter as it upgrades its logistics software in a move to speed up deliveries.
H&M shares, which have lost nearly two-thirds of their value since record highs in 2015, initially fell 4 percent but turned positive to trade 1 percent higher by 1258 GMT.
The shares are by far the most-borrowed on the country's blue-chip stock exchange with 16.8 billion Swedish crowns ($1.87 billion) of stock currently out on loan, according to data from FIS Astec Analytics, creating a periodic need for investors to cover short positions.
H&M stock has also gyrated in recent months amid large stock purchases by the founding Persson family - which has not been able to buy shares in the past month because of insider-trading regulations - and rumours of buyout plans.
Pretax profit in H&M's fiscal second quarter shrank 22 percent from a year ago to 6.01 billion crowns, slightly below the average forecast in a Reuters poll of analysts.
It said earlier in June that sales in the March-May quarter were unchanged, after falling in the previous two.
HIT AND MISS
The group's inventories and markdowns have been increasing in the past couple of years. As expected by analysts, they grew again in the second quarter to the end of May -- inventories by 13 percent and markdowns by 1 percent.
"The main issue remains the unstoppable increase in inventories... which implies a lingering threat on the gross margin over the next quarters," wrote Bryan Garnier analyst Cedric Rossi, confirming his "neutral" rating on H&M.
Persson said in a conference call with analysts that the logistics issues were not the only reason for the slow second-quarter sales, but did not elaborate.
After decades of rapid expansion growing to more than 4,700 stores, H&M has seen sales growth stall as it struggled to adapt to a customer shift online and fend off increased competition from other budget labels, resulting in fewer visitors to its main H&M brand stores.
It has also been less successful in responding to fast-changing fashions than Zara owner Inditex, which sources its clothes close to its northern Spanish headquarters and has a more flexible supply chain.
H&M, which makes the bulk of its sales in Europe, said work to speed up its logistics systems had resulted in temporary interruptions, hitting sales in major markets such as Germany and the United States.
By comparison, Inditex has reported healthy local-currency sales growth for its February-April quarter as well as for the following six weeks. ($1 = 8.9954 Swedish crowns)
(Additional reporting by Helena Soderpalm in Stockholm and Alasdair Pal in London Writing by Keith Weir and Georgina Prodhan Editing by Alexander Smith)