By  on June 10, 2009

Inditex SA, Europe’s largest fashion retailer and the owner of cheap-chic brand Zara, reported a 16 percent drop in first-quarter net income despite rising sales, as it was hit by a slowdown in its more mature European markets, especially Spain.

But the Spanish group, which operates six retail chains in addition to flagship brand Zara, shrugged off the profit slump in the quarter, saying it’s forging ahead with planned store openings and investments in 2009.

“Inditex continues to gain market share globally,” said chief executive Pablo Isla.

Net income in the three months ended April 30 fell to 184 million euros, or $239 million, compared with the same period in 2008.

Sales rose 5.4 percent to 2.34 billion euros, or $3.05 billion, as Inditex opened 95 stores in 28 countries, bringing its total store tally to 4,359 in 73 countries. Yet openings in the quarter slowed down from the 145 stores the company added in the first quarter of 2008. Dollar figures are converted at average exchange rates for the period.

Gross margin, a key indicator for retailers’ profitability, fell to 56.9 percent of sales from 57.8 percent a year earlier, mostly reflecting the effect of weaker foreign currencies on its euro-reported accounts.

Inditex’s profit decline was broadly in line with forecasts, said Sanford Bernstein analyst Luca Solca, who has a “buy” recommendation on the stock. “It’s widely known that the apparel market in Europe has been difficult, with Spain being weaker than other countries,” he said.

Inditex has held up better than its peers in the economic downturn, largely thanks to its focus on replicating catwalk trends at affordable prices.

Commenting on trading, the company said store sales have risen 9 percent in local currencies since the start of the second quarter on May 1.

Still, Inditex faces a sharp downturn in its domestic market, which has been hurt by last year’s collapse of the real estate and construction sectors, as well as the wider economic downturn. Isla declined to comment on the company’s performance in Spain, saying Inditex plans to offer a comprehensive view of its various markets in September, when the company reports second-quarter results.

Despite Spain’s weakness, analysts say Inditex’s concept of high fashion at low prices still has strong growth prospects, especially as the company increases its international footprint. Societe Generale’s analyst Anne Critchlow has estimated Spain now represents less than 30 percent of Inditex’s sales.

The group’s international store openings, particularly in newer markets in Europe and Asia, will go on as planned, Isla stressed. The company expects to open between 370 and 450 stores in the current fiscal year, down from the 573 it opened a year earlier.

“We continue to see the expansion of Zara in South Korea in the coming year,” he said, after Inditex opened a store there during the first quarter.

At the same time, he ruled out pursuing a big push into the U.S. market outside the East Coast, Los Angeles, San Francisco and Florida. Three Zara stores have already opened on New York’s Fifth Avenue.

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