Fast-fashion behemoth Inditex is seeing slower growth so far in the second half — but it’s keeping on the accelerator of expansion.
This story first appeared in the September 22, 2016 issue of WWD. Subscribe Today.
The Spanish retail group, owner of Zara and other chains, defied the downward trends of fellow fast-fashion retailers and reported a 7.5 percent uptick in first-half profits on the back of double-digit sales growth. But in-store and online sales in local currencies were up 13 percent in the Aug. 1 to Sept. 18 period, compared with 16 percent in the first half.
The company is also expecting currency headwinds to shear full-year sales by 2.5 percent if today’s exchange rates persist.
The news spooked investors, sending the share price down 1.6 percent to close at 32.17 euros, or $36.03 at current exchange.
But Inditex isn’t scaling back its aggressive expansion program in markets such as North America and China with its much-touted bricks-and-clicks strategy.
Pablo Isla, the group’s chairman and chief executive officer of Zara’s parent, said the company performed strongly in the six months ended July 31, with “significant growth opportunities” worldwide and “attractive, long-term returns” on investment.
The brand said that global online launches planned for the second half are on track, while digital e-commerce platforms for all its fashion retail concepts are set to roll out in Turkey in October.
New space is expected to contribute 5 percent to sales growth in the year.
In addition to Zara, which generates two-thirds of group sales, Inditex operates fashion retail concepts such as Oysho, Massimo Dutti, Bershka and Pull&Bear. At the end of the first half, it operated 7,096 stores in 91 markets.
The company recently revealed that it would be slowing the pace of brick-and-mortar expansion as it seeks to strike a balance between physical and online stores. It’s looking to creating a “seamless” retail experience, with in-store collect-and-return, mobile payments and other services that fuse the two channels.
On Wednesday during a call with analysts, Isla talked about the launch of mobile payments in Spain, and the planned rollout of that service to stores worldwide, as well as the ongoing strategy of creating larger, “differentiated” physical flagships.
The new Zara flagship in the company’s hometown of La Coruna, Spain, boasts nearly 26,000 square feet of retail space spread over five floors, and displays all the latest and most fashion-forward clothing collections.
The design team has preserved the building’s original features while the store displays, vast windows and glass galleries have been put forward for LEED Gold environmental certification as part of the group’s eco-efficient store plan, he said.
Asked about new markets, he called North America “very important and attractive,” and highlighted the new Zara flagship in Manhattan’s SoHo district. Isla said Inditex will open about 12 to 15 stores a year in the U.S. — a mix of flagship and shopping mall units — with the focus on Zara.
Capital expenditure for the current fiscal year remains unchanged at 1.5 billion euros, or $1.68 billion, with retail space growing at a pace of 6 percent to 8 percent annually.
China is another big opportunity, he said, with plans to open “relevant flagships” and stores inside shopping malls. Inditex is opening about 60 stores a year in the country.
In the first half, the company opened in 38 international markets, many of them new, including the island of Aruba, Nicaragua, Paraguay, and Vietnam in Ho Chi Minh City. A Zara store in Auckland, New Zealand, will be unveiled in the first week of October.
First-half net profit was up 7.5 percent to 1.26 billion euros, or $1.41 billion, while sales in the six months climbed 11.1 percent to 10.47 billion euros, or $11.73 billion. Like-for-like sales advanced 11 percent.
All figures have been converted at average exchange rates for the six-month period.
Sales at Zara and Zara Home grew 13 percent and 17 percent, respectively, while other brands, such as Bershka and Massimo Dutti, grew in the single digits.
Asked to expand on why Inditex has managed to notch double-digit sales growth in what is proving an uneven climate for its competitors, Isla said: “The execution of our business model and online and in-store optimization.”
Earlier this month, Hennes & Mauritz reported that revenues rose 6 percent in the third quarter, but that figure paled in comparison to a 7 percent sales increase in August and a 10 percent spike in July, all in local currency terms.
In the wake of the first-half results announcement on Wednesday, Euromonitor International issued a brief report on Inditex, saying its multibrand strategy is a key part of its success and has driven the high speed of its international expansion.
It also laid out the challenges that the Spanish giant faces as the retailer seeks to go omnichannel.
“Although the physical store remains king for Inditex, it is rapidly upscaling its online offer and slowing net new store openings,” the report said. “The global market is evolving, and Zara is pursuing this trend, opening its online sales platform in Hong Kong, Taiwan, Macao and Australia in 2015, and it is set to add a further 11 markets by the end of 2016. Inditex aims to be online in all markets in the long term.”
The report pointed out that China could prove a challenge for Inditex, where it will face “stiff competition” from pure-play Internet retailers like Asos and Amazon. Investment in marketing to differentiate itself may be required, Euromonitor said.