Zara's revamped flagship in Milan.

PARIS Seeking to consolidate its lead on rivals, Zara owner Inditex is shoring up its digital firepower despite disruption from the coronavirus, with a pledge to continue investing in integrating stores and online services in the coming months.

Sales and earnings fell slightly below expectations over the first quarter, but the Spanish fast-fashion retailer seized on its financial report to reveal plans to invest 1 billion euros in bolstering its online platforms and 1.7 billion euros to integrate the stores into the digital system over the next two years.

First quarter sales for Inditex, which also owns the labels Stradivarius, Massimo Dutti and Bershka, were down 44 percent, when the vast majority of its stores around the world were closed due to the coronavirus crisis.

The plans, coming from a nimble retailer with state-of-the-art facilities, highlight the extent to which COVID-19-related store closures have served to speed up the development of digital channels for retailers around the world, and prod hesitant consumers to embrace purchases over the Internet.

Online sales were up 50 percent in the quarter, soaring 95 percent over the month of April alone. E-commerce is expected to account for more than a quarter of total sales in 2022, compared to 14 percent last year, noted Inditex.

Integrating stock — selling stock from stores online — proved key to online sales performance, said the company.

“That is why we believe in an integrated approach, without full stock integration we wouldn’t be able to have significant online growth because a big part of products in April and May are products in stores that were closed,” explained Inditex executive chairman Pablo Isla.

Sales over the first quarter came to 3.3 billion euros, a period that saw the closure of 88 percent of its store network. Gross margin remained constant at 58.4 percent of sales, the company said.

Executives expect to reopen most of its stores this month — most stores in Spain have reopened since the start of the week, and consumers are behaving “normally” in stores that have reopened, they said. The company said 5,743 stores are open in 79 markets.

Executives said they expect an improvement in sales trends over the next quarter.

Markets in Asia are showing a return to sales levels seen last year, they added, citing China, Japan and South Korea.

The net loss over the quarter came to 409 million euros, a figure dragged down by a 308 million euro provision to invest in digital systems and integrating store networks.

In a sign of its resilience, thanks to a flexible model that allows it to adapt production quickly, operating expenses were down 21 percent and the cash position remains firm, if slightly lower, at 5.8 billion euros compared to 6.7 billion in April last year.

“The flexibility of the supply chain has proven to be pivotal during this period,” said Inditex executives, speaking in a conference call with analysts.

The company plans to close smaller stores and focus on its larger flagships, which are outfitted with RFID tracking technology, with an overall growth of selling space of around 2.5 percent per year. As many as 1,200 stores could be culled over the next two years.

Inditex, which projects annual sales growth of between 4 and 6 percent and annual capital expenditure of around 900 million euros as part of its 2022 plan, will offer a dividend of 35 euro cents per share this year, subject to shareholder approval.

The retailer produced and procured medical and health equipment, including medical garments, to help Spain battle COVID-19.

“Our priority through the crisis has been and continues to be the health and safety of our customers,” said Isla.

“Past the worst,” with stronger free cash flow expected, said analysts at RBC Europe. The results fell slightly below expectations, but comments on expectations of future cashflows, with lower capex and inventory as well as trading in Asia and online margins, were “encouraging,” noted Richard Chamberlain of RBC Europe, who maintained his outperform rating on the shares.

The analyst reduced profit before tax and earnings per share forecasts for 2021 and 2022 by 4 to 5 percent. RBC analysts view the company as one of the industry leaders in sustainability.

Store closures could deliver margin tail winds of around 30 basis points, estimated analysts at Berenberg, noting that the numbers provided by the company suggest that the stores, on the whole, generate lower margins than the company overall.

Comments from Inditex management about customers behaving ‘normally’ once in stores and sales returning to prior year levels in China, Japan and South Korea over the last week “may be taken somewhat positively,” added Berenberg analysts.

Berenberg analysts estimate that store estate restructuring will lead to a slowdown in topline growth in the mid term by around 3 to 5 percent a year, excluding the impact of COVID-19.

Swedish rival H&M Group said last month that sales plummeted 57 percent in local currencies from March 1 to May 6, when the vast majority of stores were ordered shut across Europe and the U.S. Business was muted in markets that had just opened, while online sales had increased in by 32 percent in the March-to-May 6 period. H&M has said it expects its second quarter to be loss-making as it seeks to rein in costs related to purchasing, investments, staffing and rents, which will likely not be enough to compensate for the steep sales declines.

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