Zara Owner Inditex's Profit Beats Expectations -- Update

By Patricia Kowsmann 

Inditex SA, the retailer behind the Zara fast-fashion chain, reported a better-than-expected rise in first-half net profit, continuing to benefit from its focus on easily renewed inventory and quick deliveries to drive up sales.

The world's largest fashion retailer by revenue said on Wednesday that net profit rose 7.7% to EUR1.26 billion in the six months to end-July from EUR1.17 billion in the same period last year on an 11% rise in sales to EUR10.47 billion. Based on Inditex's first-quarter report, that implied an 8.8% rise in second-quarter profit to EUR645 million on an 11% rise in sales to EUR5.59 billion.

Inditex, whose official name is Industria de Diseño Textil SA, said sales continued to grow in recent weeks, with 13% growth in physical and online sales in constant currency terms between Aug. 1 and Sept. 18.

The clothing supplier's robust growth, ahead of the average of analysts' second-quarter forecasts, contrasts with many of its rivals' recent performance.

Gap Inc. reported falling second-quarter sales as retailers in the U.S. continued to struggle with shrinking foot traffic and growing competition among companies seeking to deliver quicker and cheaper fashion. Inditex's closest competitor, Swedish fast-fashion giant Hennes & Mauritz AB, last week said August sales were hit by an unusually hot late-summer weather. Overall, H&M's sales growth has lagged behind that of Inditex, which has more physical stores.

Analysts say Inditex has an edge over rivals because of its centralized operations in Spain and close-by production centers. According to Société Générale, while 65% of its products are sourced in Spain, Portugal, Turkey and North Africa, most other retailers source about 80% of their products from Asia.

The proximity allows Inditex to quickly respond to customer demand, new tastes and even the weather, which in turn gives it a pricing power rivals like H&M don't have.

"We continue to believe Inditex is a structural winner with its strong brand and well adapted business model," Berenberg analysts said in a note.

Inditex's pricing power means it can offer customer-friendly services, including free online delivery and returns, without hurting margins, according to Société Générale analyst Anne Critchlow. Its centralized operations, meanwhile, make the cost of adapting its business to cope with growth in online shopping lower than at H&M, for instance, which has several warehouses spread around the globe.

Ms. Critchlow estimates online sales should account for roughly 6% of overall sales this year, leaving it with much room to grow.

While online offers expand, the company has vowed to slow down the pace of retail space growth over the years and focus on the more profitable flagship stores. In the first half of the year, Inditex opened 83 stores, bringing the total number to 7,096 world-wide. Out of 92 markets where it is present, 39 have online stores.

Analysts polled by Thomson had expected second-quarter net profit of EUR691 million on sales of EUR5.57 billion.

Write to Patricia Kowsmann at [e-mail]

(END) Dow Jones Newswires

September 21, 2016 02:52 ET (06:52 GMT)

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