STOCKHOLM, Sweden —Nobody ever cut their way to growth. So Hennes & Mauritz AB deserves credit for investing despite the extremely difficult environment for clothing retailers.

H&M's core brand is under pressure from cheaper rivals, such as Primark and online upstart Boohoo.com Plc. So its response, to diversify into new brands with a different aesthetic and higher prices, is smart.

And it's paid off. The fashion-favourite Cos is celebrating its tenth anniversary. It had 199 stores at the end of February. That's a fraction of H&M's 4,000, but the brand has a strong following and H&M says it's as profitable as the core stores. The & Other Stories chain, a slightly more grown up fast-fashion outlet, has started even better than Cos.

This autumn will see the launch of another new format, Arket. It will sell classic garments for men, women and children, as well as home furnishings. Given that consumers are spending more money on "experiences", the shops will have a café selling fashionable Nordic cuisine. The emphasis is more on lifestyle than fashion, also prudent given that consumers are falling out of love with clothes.

H&M has been investing elsewhere too, including online and its supply chain. Its capital expenditure has more than doubled in five years. It can afford to spend. It has net cash, although the cash balance has more than halved over that same period.

Yet H&M's need to diversify was underscored on Thursday. While net income in the three months to the end of February was better than hoped for, with a higher gross margin, inventories rose 28 percent year-on-year, excluding currency movements. March sales were weaker than expected. If this doesn't get better in April and May, H&M will have to cut prices even further.

Meanwhile, the stronger dollar weighs heavily. H&M sources about 80 percent of its products from Asia, where suppliers like to be paid in the US currency.

The shares fell almost 6 percent because of the price cut warning. They've fared far less well than Zara owner Inditex SA, which has less Asian production and faster sales growth. H&M shares trade at just under 18 times estimated forward earnings, a steep discount to the 27 times at Inditex.

The Spanish rival isn't problem-free. It gross margin fell to its lowest in eight years in the fourth quarter.

The valuation gap is deserved, given Inditex's stronger sales growth, although the company is not without its own challenges: primarily stabilising or expanding margins while it increases sales. H&M can consider itself a little hard done by given its more imaginative response to changing trends among shoppers.

Still, if it wants to make up the lost ground, it really needs to zip up its boots and get the core H&M stores marching again.

By Andrea Felsted; editor:James Boxell. This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

The views expressed in Op-Ed pieces are those of the author and do not necessarily reflect the views of The Business of Fashion.