June 13, 2018 / 6:53 AM / a year ago

Zara owner Inditex boosts profitability despite strong euro

MADRID (Reuters) - Inditex (ITX.MC), the world’s biggest clothing retailer and owner of fashion brand Zara, reported improved profitability on Wednesday for the first three months of its financial year despite the dampening impact of a strong euro.

However, sales in the first quarter were weighed down by negative currency effects and unseasonably cold weather in Europe meaning the quarterly growth rate was a mere 2 percent, lower than rates booked during the financial crisis.

Sales for the first six weeks of the second quarter were more robust, up 9 percent in local currencies, as shoppers snapped up items from summer collections including striped maxi skirts and linen dresses at Zara.

Shares initially slipped on disappointment over the weak first quarter sales growth, but later rebounded to change hands 3.7 percent higher and lead the gainers on Spain's blue-chip index .IBEX in afternoon trade.

Stripping out that negative currency impact, first-quarter sales growth was 7 percent. The gross margin increased from the year-ago period, despite many analysts forecasting a fall, coming in at 58.9 percent of total sales.

A strong euro can act as a drag on profitability for Inditex, the owner of upmarket chain Massimo Dutti and underwear store Oysho.

The group, controlled by founder Amancio Ortega, generates more than half of its sales in currencies other than the euro and then books those sales in euros when reporting results.

Inditex’s centralised sourcing and distribution model also means a large chunk of its costs are in euros.

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First-quarter earnings before interest, tax, depreciation and amortisation were 1.13 billion euros, in line with analysts’ expectations.

The company opened new stores in 36 markets and launched online sales in Australia and New Zealand during the period. However, the number of net stores declined over the three months to 7,448 as the company closed smaller shops to focus on big destination-style stores that complement its online offering.

Reporting By Sonya Dowsett; Editing by Biju Dwarakanath/Keith Weir

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