By  on December 16, 2010

PARIS — Fast-fashion retailers continued to thrive in the run-up to the holiday season, but rising input costs threaten to pressure their margins heading into 2011, figures published Wednesday by market leaders Inditex SA and Hennes & Mauritz showed.

Spain’s Inditex, Europe’s largest clothing retailer and owner of the Zara chain, said net profit rose 42 percent in the first nine months of its 2010 fiscal year as the group continued to rapidly expand in Asia and roll out its Zara online store across Europe.

Meanwhile, H&M reported that same-store sales rose 8 percent in November, the same month its collaboration with French luxury label Lanvin was introduced, helping to fuel a 5 percent increase in sales for the financial year as a whole.

Inditex posted net profit of 1.18 billion euros, or $1.55 billion, between Feb. 1 and Oct. 31. Sales totaled 8.87 billion euros, or $11.64 billion, up 14 percent versus the same period last year. Dollar figures are converted from euros at average exchange rates for the period in question.

The gross margin stood at 59.9 percent of sales, up from 57.1 percent in the first nine months of fiscal 2009. Store sales in local currencies climbed 10 percent year-on-year between Aug. 1 and Dec. 12.

Analysts said the figures were broadly in line with expectations, although, based on the available data, they calculated that sales growth slowed somewhat during the first six weeks of the fiscal fourth quarter.

“We think this number is very satisfactory,” said Marcos López, capital markets director of Inditex. “We have still ahead of us the Christmas season and after Christmas, so I would say that at this point in time, I believe that 10 percent sales growth in local currencies is a very reasonable one.”

Inditex deputy chairman and chief executive officer Pablo Isla noted the exceptional factors that fueled gross margin growth in the first half of 2010 — including inventory management, sourcing proximity and a positive currency impact — were set to fall away in the second half.

“It is evident that there is some cost inflation regarding raw materials, regarding wages in some countries, particularly China. At the same time…because of our business model, because of our sourcing in proximity, because of the long-term relationships that we have with our suppliers, we are less exposed,” he said.

Inditex manufactures half its products in the Eurozone, allowing the company to respond rapidly to spikes in demand for high-turning products and helping to keep inventories lean.

Isla declined to comment on the gross margin outlook for 2011, saying the issue would be addressed when the group, based in Arteixo in northwest Spain, publishes full-year results next March. However, he said Inditex planned to keep prices stable in 2011.

Peter Farren, analyst at investment bank Bryan, Garnier & Co., said that although the results were to be expected in light of a more difficult basis for comparison in the fourth quarter, he would not recommend buying the stock for the next few months due to uncertainty over the gross margin in 2011.

“I think Inditex is better placed than H&M in terms of the gross margin because they source locally, but that doesn’t mean they will be completely spared by the rise in the price of raw materials,” he said.

H&M, conversely, faces tougher prospects for its gross margin in the next two quarters, but is likely to benefit from easier comparisons in terms of like-for-like sales growth in the coming months, Farren noted.

The Stockholm-based firm said that, including new stores, November sales rose 17 percent, compared with 13 percent in October. On the same basis, total sales for the 2009-2010 financial year, which runs from Dec. 1 to Nov. 30, were up 15 percent, compared with a 4 percent increase in 2008-2009.

As of Nov. 30, the Swedish fast-fashion retailer operated 2,206 stores, compared with 1,988 on Nov. 30, 2009.

Inditex continued its rapid pace of store expansion during the nine-month period, with 300 new units in 45 countries under its various banners, including Zara, Massimo Dutti, Bershka, Stradivarius and Pull&Bear. As of Oct. 31, it operated 4,907 stores in 77 countries.

This included 140 stores in China and 63 in Japan, where Bershka is set to arrive next year with a flagship store in the Shibuya neighborhood of Tokyo. Massimo Duti recently opened its first two stores in South Korea, where Zara already has 27 stores.

“If you assume a range of between 8 to 10 percent space growth in the case of Zara, at least 50 percent of that will take place in Asia,” said Isla.

Inditex last week unveiled its 5,000th store, a Zara unit in Rome that it has designated as a benchmark for the company’s plan to make all stores eco-efficient by 2020.

The retailer introduced online shopping for Zara in six European countries in September, making the service available in five additional countries in November. “We are very satisfied with customer reception to our online offer,” Isla said.

In 2011, is scheduled to be launched in the United States and Japan, while the first Zara stores will open in South Africa and Australia.

Luca Solca, an analyst at Bernstein Research in London, said the results from both companies confirmed their fast-growth trajectory.

“Growth is bound to become rarer in a muddle-through macroeconomic environment, and therefore more expensive. Mass fashion players such as Inditex and H&M are bound to benefit from this, as they can provide above-average growth by continuing to increase space worldwide,” he said.

Inditex shares closed down 5.54 percent at 59 euros, or $79.11, while H&M shares were down 2.04 percent at 239.50 Swedish kronor, or $35.18.

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