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Zara owner Inditex keeps up with weather forecasts to boost sales growth
December 14, 2016 / 6:33 AM / a year ago

Zara owner Inditex keeps up with weather forecasts to boost sales growth

MADRID (Reuters) - Inditex (ITX.MC), the world’s biggest clothing retailer and owner of Zara, used its “fast fashion” model to adapt to warmer than usual autumn weather, speeding up its sales growth in recent weeks and staying ahead of slower-moving rivals.

Unlike the Spanish firm, Abercrombie & Fitch (ANF.N) and Gap (GPS.N) posted dismal fourth-quarter sales last month.

Inditex reacts to changing fashion trends and weather by keeping its manufacturing bases close to its distribution centre in Galicia, northern Spain. Items are designed, made and shipped to stores often in less than a month, boosting profitability.

Net profit for the nine months to the end of October was up 9 percent from the year before at 2.2 billion euros (1.81 billion pound), in line with analysts’ forecasts, as garments such as velvet dresses, military blazers and mini skirts helped push Inditex sales up by 14.5 percent in local currency terms.

With more than 7,200 stores in 93 markets, Inditex has shifted from multiple new store openings to setting up large flagship stores in key locations and tying in its online business instead.

Apart from Zara, which makes up two thirds of sales, its brands include younger fashion chain Pull&Bear and upmarket label Massimo Dutti.

Other retailers have been trying to speed up their supply chain to match Inditex but are held back by their sourcing from Asia, stretching lead times. They have also started investing in new higher-margin brands.

But Inditex has matched them and has scope to expand further. Analysts at Macquarie say it has only a 2 percent share of a “highly fragmented” global market and they expect it to grow quickly in emerging markets and the United States.

Zara's logo is seen on a clothes hanger in a Zara store, an Inditex brand, in central Barcelona, Spain, December 13, 2016. REUTERS/Albert Gea

ACCELERATING SALES

Between November and mid-December, Inditex’s sales growth accelerated to 16 percent from a year before, implying growth of 10.5 percent once the effect of new store openings is stripped out, Bernstein analysts said.

“The reason for our strong like-for-like sales growth ... has to do with the global execution of our business model, the fully integrated approach between stores and online,” Chairman Pablo Isla told analysts.

The like-for-like sales growth compares with its next biggest rival H&M’s (HMb.ST) reported 10 percent year-on-year increase in local-currency sales in October. H&M is due to publish November sales on Thursday.

Analysts expect H&M and others to have been hit by the warmer autumn weather as they failed to swap out collections of cold-weather items to attract shoppers.

Inditex shares were down 1.9 percent by 1010GMT, against a 0.5 percent fall on the European STOXX 600 index . They have risen 2.5 percent over the past year, against a near 9 percent fall in H&M’s shares.

Analysts contributed Inditex’s share price dip to a slight miss of forecasts for their gross margin - the profit obtained after selling a product - and said they needed to improve earnings before interest and taxes (EBIT) to rise higher.

“Currency translation was very negative in the first half but in the second half it will have much less of an impact. That’s why EBIT growth should continue to recover which should help the shares make progress,” SocGen analyst Anne Critchlow said.

Critchlow said third-quarter EBIT was up 11 percent year-on-year to 1.2 billion euros, 0.4 percent below consensus. EBIT was in the single digits for the previous three quarters.

Additional reporting by Robert Hetz; Editing by Greg Mahlich and Alexander Smith

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