Zara Parent Inditex Sees Profits Jump 30%

Spanish retailer said sales increased 15 percent during the fiscal first quarter.

A Zara store in Beijing.

Defying general economic gloom in Europe and Spain’s particular predicament, Inditex SA said net profits jumped 30 percent in the first quarter of fiscal 2012.

This story first appeared in the June 14, 2012 issue of WWD.  Subscribe Today.

The results sharply exceeded analysts’ expectations as new store openings and growing online sales more than compensated for continued weakness in the retailer’s domestic economy.

Shares in Inditex, owner of the Zara retail chain, climbed on the news, closing up 11.5 percent to 75.40 euros, or $94.17 at current exchange, on the Madrid Stock Exchange.

Europe’s largest clothing retailer registered net profits of 432 million euros, or $570 million, between Feb. 1 and April 30. Sales increased 15 percent to 3.4 billion euros, or $4.5 billion. The gross margin stood at 60.2 percent of sales, up from 58.8 percent during the same period last year.

Dollar figures are converted at average exchange rates for the periods to which they refer.

“The current base offers huge growth potential for the coming years,” Inditex chairman and chief executive officer Pablo Isla said during a conference call with analysts.

Inditex, which is based in Arteixo, Spain, suggested the momentum continued into the fiscal second quarter, noting that store sales in local currencies increased by 14 percent between Feb. 1 and June 10.

Analysts said the performance was remarkable in light of the crisis gripping the Spanish economy, which is deepening despite the news last weekend that the European Union will release 100 billion euros, or $125 billion, in emergency funds to rescue the country’s banks.

Spanish retail sales fell by a record 9.8 percent in April as consumers tightened their belts in the face of austerity measures designed to stave off a debt crisis.

Jamie Merriman and Anthony Sleeman of Bernstein Research calculated that Inditex posted like-for-like sales growth of 6.5 percent in the quarter, 230 basis points above their forecast for the fiscal year ended Jan. 31, 2013. They said the margin expansion was due to two factors.

“First, Inditex’s short supply chain means the company is benefiting from lower input costs, as the price of cotton and other textiles has fallen, in advance of competitors. Secondly, we expect there has been continued mix shift away from Spain in [the first quarter],” they said in a report.

Inditex has been gradually reducing its reliance on the domestic market, which accounted for 25 percent of total sales in 2011 versus 28 percent in the prior-year period, while Asia and the rest of the world represented 18 percent, up from 15 percent previously. Nonetheless, Isla said he was confident in Spain’s future.

“I fully believe that the effect of the reforms that are being adopted will start to become evident in the coming quarters,” he said.

Inditex is investing 290 million euros, or $362 million, into expanding its domestic locations to keep pace with its global expansion.

During the first quarter, the company started work on a 750,000-square-foot extension to its corporate headquarters, which is expected to generate 400 new jobs. It is also building a logistics platform in the Catalonia region of Spain that is due to create another 500 jobs.

“We always try to be a little bit in advance of the needs of the company. The company is growing, all the teams are becoming stronger,” Isla said.

He added that the gross margin growth in the first quarter was linked to proximity sourcing and like-for-like sales growth, but declined to elaborate. The company’s business model allows it to react more rapidly to consumer tastes and market evolutions, reducing the need to mark down stock.

Describing the sourcing environment as “stable,” Isla said Inditex was not planning any price hikes.

“We are offering to our customers very high fashion, high quality and affordable prices and our policy of maintaining stable prices in different markets is something that we are not planning to change in the future,” he said.

The company plans to pursue an ambitious program of store openings, which calls for an additional 480 to 520 units this year, including 130 in China.

The group opened 91 units worldwide in the first quarter, bringing the total to 5,618 doors as of April 30. This included the Zara global flagship, located on the corner of New York’s Fifth Avenue and 52nd Street, in addition to Zara stores in key locations in Berlin, Tokyo and Chongqing, China.

Inditex capital markets director Marcos Lopez said Zara and the group’s other concepts had performed broadly in line with each other, with some small variations. “Regarding the younger concepts, Stradivarius and Pull & Bear have performed above the average, and Oysho and Massimo Dutti, below the average,” he said.

In May, Inditex opened stores in Ecuador for Zara, Pull & Bear, Bershka and Stradivarius, bringing the number of markets in which the group has a presence to 85.

In the fall, it will open its first Massimo Dutti stores in the U.S. — one in the former Zara store on New York’s Fifth Avenue, and one in the Georgetown district of Washington, D.C., Isla said.

The group also continues to expand e-commerce, though it again declined to detail the percentage of sales generated online. Having launched e-commerce for Zara in Poland in March, it plans to do the same in Mainland China in September.