By Jens Hansegard

STOCKHOLM--Sweden's Hennes & Mauritz AB kept expanding at a steady pace in its most recent quarter, clocking in net profit of nearly $800 million. In some of its markets, however, the fashion giant is facing a growing challenge to find its place on the high street.

In its pursuit of industry leader Inditex SA--the parent company of Zara, which offers pricier clothes--the world's second largest fashion company by revenue has sought to move upmarket in recent years. It has plowed more money into flagship stores, opening 379 last years, and has launched more upmarket brands including COS.

But, the Swedish giant is increasingly under siege by the cheaper end of the fast-fashion world, with rivals like Dublin-based Primark aggressively opening new stores with the promise of ultra-slim price tags.

"The clothing retail market has become a lot tougher," H&M Chief Executive Karl-Johan Persson said in an interview. "It has gone from being very competitive to super competitive."

Mr. Persson, who once headed the team that launched COS, said H&M is working on two new fashion brand concepts. He declined to say whether H&M would aim to move away from the cheaper segment of the fashion market, or on the contrary seek to compete head-on with the likes of Primarks. But he said one of the two new chains could hit streets as soon as in 2017.

H&M's positioning headache highlights the uphill struggle of tailoring a global brand that appeals to shoppers around the world.

H&M's problems are on high display on London's Oxford Street, where no fewer than two Primark and two H&M stores are competing for shoppers' wallets. In the U.K., H&M's 253 stores are now rubbing elbows with Primark's 164 stores and Zara's 66 stores.

In the autumn Primark is planning to open its first store in the U.S., a country where H&M has 370 outlets.

A pioneer of sourcing most of its clothes in low labor cost Asia, H&M used to have a big competitive advantage. But rivals have followed H&M's silk road, and labor costs have increased sharply in many parts of Asia, eroding H&M's edge.

The company must respond by creating cheaper brands or lowering prices at its H&M stores or risk losing big chunks of market share, analysts said.

Mr. Persson said H&M was in no rush to refashion the company's strategy.

"Our model works for us, and other price levels work for other companies, " he said. "There are successful and unsuccessful competitors in all price segments."

H&M said net profit increased to 6.45 billion Swedish kronor ($783.5 million) in the three months to May. 30, from SEK5.81 billion a year earlier.

Sales in the quarter, excluding value added tax, amounted to SEK45.87 billion, up from SEK37.83 billion last year.

The group's closely watched gross margin slipped to 59.4% from 60.8%, mainly because of adverse currency fluctuations, the company said.

Write to Jens Hansegard at jens.hansegard@wsj.com

Access Investor Kit for Industria de Diseño Textil SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=ES0148396007

Access Investor Kit for Hennes & Mauritz AB

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=SE0000106270

Access Investor Kit for Industria de Diseño Textil SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US4557931098

Subscribe to WSJ: http://online.wsj.com?mod=djnwires