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Inditex Posts 7.6 Percent Profit Drop

Inditex SA, Europe’s largest fashion retailer and the owner of Zara, reported a smaller-than-expected drop in first-half net income.

PARIS — Inditex SA, Europe’s largest fashion retailer and the owner of Zara, reported a smaller-than-expected 7.6 percent drop in first-half net income as new store openings helped offset the continuing downturn in Spain, its home market.

This story first appeared in the September 17, 2009 issue of WWD.  Subscribe Today.

In a bid to spur sales, the Arteixo, Spain-based company also unveiled long-awaited plans to start selling Zara apparel online for the first time next year, suggesting its other brands could become available on the Internet in the future.

Zara will offer online sales in the fall 2010 season, initially in Spain, France, Germany, the U.K., Italy and Portugal, with a progressive rollout expected in all other markets.

“The Internet is increasingly becoming a relevant channel,” said chief executive officer Pablo Isla. “There are no specific plans in the short term to launch other formats on the Net. But in the medium term, we could expect other formats to go online.”

Unlike competitors such as Hennes & Mauritz AB, which have set up extensive online operations, Inditex’s only foray into the Internet so far has been an online store for Zara Home, its home furnishings brand.

Isla said the aim of the Zara online business is to complement store sales. “We aren’t expecting sales cannibalization at all,” he added. Although there will be marketing initiatives to promote the Zara site, Inditex doesn’t plan to change its no-advertising policy, or launch a complementary catalogue, according to Isla.

In the February-to-July period, Inditex’s net income declined to 375 million euros, or $502.5 million, but still beat analysts’ consensus expectations of 352 million euros, or $471.7 million.

In the three months to July 31, net profit rose 2.1 percent to 191 million euros, or $265.5 million, with sales rising 7.7 percent to 2.52 billion euros, or $3.5 billion.

Sales in the first half rose 6.6 percent to 4.86 billion euros, or $6.5 billion, helped by store openings, as Inditex unveiled 166 stores in 35 countries. Stripping out the contribution from new stores, same-store sales declined by 2 percent. Dollar figures are converted at average exchange rates for the period.

Turning to current trading performance, Inditex said total store sales in local currencies rose 9 percent in the period between Aug. 1 and Sept. 14, and maintained its forecasts for investments and store space in 2009.

Gross margin — a key profitability indicator — fell to 55.3 percent in the first half from 56.4 percent in the same period a year earlier, as the strengthening of the dollar made purchasing raw materials more expensive.

The decline in profitability also reflects a tough market in Spain, which accounts for 32 percent of Inditex’s sales and where the company is experiencing pricing pressures. The country has been severely hit by the global economic downturn, after its once-booming real estate market collapsed last year, and it has one of Europe’s highest unemployment rates.

Merrill Lynch analyst Richard Chamberlain, who has an “underperform” recommendation on Inditex, called the planned online rollout “a good defensive move to respond to the structural growth of online clothing sales.” But he remained cautious about the Spanish market, even though sales seemed to have stabilized in the second quarter. “We expect only a slow recovery in Inditex’s home market,” he added.

Although some Western economies have been showing signs of recovery from the recession, retail experts have voiced concerns that consumers in developed countries may remain cautious and keep discretionary expenses to a minimum on fears of unemployment.

As a result, Inditex is pursuing an ambitious store opening program into more buoyant markets, such as Asia, targeting between 370 and 450 new stores worldwide in 2009. Inditex, which also owns the Massimo Dutti and Bershka brands, said China alone is home to more than 50 stores.