September 20, 2017 / 5:19 AM / 2 years ago

Zara owner's sales margin eroded by strong euro

MADRID (Reuters) - Inditex (ITX.MC), the world’s biggest clothes retailer and owner of Zara, reported a 9 percent rise in first-half profit on Wednesday but its gross margin as a percentage of sales slipped because of a stronger euro.

Inditex’s profits are sensitive to fluctuations in the currency as it makes most of its clothes in the euro zone to respond quickly to fashion trends but generates more than half of its sales in countries outside the currency bloc.

The decline in its gross margin meant Inditex missed forecasts for second-quarter earnings before interest and tax (EBIT), analysts said, and the Spanish firm’s shares fell as much as 3 percent after the results before recovering slightly.

Shares in Swedish rival H&M (HMb.ST), which has the majority of its sourcing costs in U.S. dollars, rose 0.5 percent.

Inditex said its gross margin as a percentage of sales fell to 56.4 percent from 56.8 percent in the first six months of its financial year, which runs from Feb. 1 to July 31.

Its first-half net profit of 1.37 billion euros (1.22 billion pounds) was slightly short of expectations while earnings before interest, tax, depreciation and amortisation (EBITDA) came in at 2.29 billion euros, up 9 percent from a year earlier.

Chairman and Chief Executive Pablo Isla said the sales margin was still stable, and would remain so for the full year. Inditex’s definition of a stable margin is one that rises or falls by no more than 50 basis points each year.

Inditex’s model of responding to catwalk trends with small batches of clothes that are not replaced when they sell out has allowed it to consistently outperform rivals such as H&M.

A woman walks in front of an advertisement for an Inditex owned Zara store in Milan, Italy, March 30, 2017. REUTERS/Alessandro Garofalo

The Spanish retailer’s other brands include teen label Bershka and underwear chain Oysho.

Figures showed that recent sales in the company’s more than 7,000 stores worldwide were performing well, as shoppers snapped up items such as reversible kimonos and sweaters embellished with faux pearls from Zara’s autumn/winter collections.

Sales after adjusting for currency fluctuations rose 12 percent in the first seven weeks of the second half, which Societe Generale retail analyst Anne Critchlow said was 1 or 2 percentage points better than the consensus forecast.

Reporting by Sonya Dowsett; editing by Stephen Coates and David Clarke

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