Inditex saw its profitability shrink again last year as adverse currency swings and stiff competition weighed on its margins, while Hennes & Mauritz reported lower-than-expected sales growth in February — indicating even fast-fashion players aren’t immune to the travails hitting fashion retail.
Inditex, the owner of eight brands including Zara and Massimo Dutti, said net profit rose 9.7 percent to 3.16 billion euros, or $3.49 billion, in the 2016 fiscal year ended Jan. 31, as it continued to expand worldwide, posting same-store sales growth in all geographies and across all brands.
But the gross margin, a key indicator of profitability, fell for the fourth consecutive year. It stood at 57 percent, compared with 57.8 percent a year earlier, missing the retailer’s target of keeping the margin within a range of plus or minus 50 basis points of its 2015 level.
Pablo Isla, chairman and chief executive officer of Inditex, said adverse currency swings were to blame. “During the year 2016, excluding currency fluctuations, our gross margin on sales would have increased,” he told a conference call following the publication of the results on Wednesday.
He added that he expected the margin to stabilize or improve this year. “At current exchange rates, we do not anticipate at all a decline in gross margin in fiscal 2017,” Isla said.
The world’s largest fashion retailer opened 279 stores in 56 countries last year, including five new markets: New Zealand, Vietnam, Paraguay, Aruba and Nicaragua. It launched or expanded its online platform in a total of 20 markets, of which 12 were new. The group now offers e-commerce in 43 countries.
Inditex expects to continue opening flagships in the world’s top shopping districts and absorbing smaller units into adjacent stores, as it did this year.
In the next few months, it will unveil new stores for cash-cow brand Zara in Nagoya, Japan; Doha, Qatar, and Mumbai. Also in the pipeline is a 65,000-square-foot Zara flagship on Madrid’s Paseo de la Castellana, its largest in Spain.
The retailer will also continue to expand its e-commerce activities. Following launches in Singapore and Malaysia earlier this month, Zara’s online store is set to go live in Thailand and Vietnam in the coming weeks, with a launch in India set for the second half.
“We believe that Inditex is in an excellent position to take advantage of global growth opportunities. We have a strong potential to continue expanding profitably in the coming years,” Isla said.
“We are in a unique position as we enjoy a global sales platform that fully integrates stores and online as the best way to respond to the demands of our customers,” said the executive.
The Arteixo, Spain-based group has capitalized on a proximity sourcing model that allows it to replenish all its stores at least twice a week, meaning that it constantly delivers new product with a strong fashion viewpoint.
The company delivered same-store sales growth of 10 percent in 2016, up from 8.5 percent in 2015. Sales in constant currency terms rose 13 percent between Feb. 1 and March 12, adjusted for calendar effects, since February 2017 had one day less than February 2016, which was a leap year.
But while Inditex saw strong gains in some areas last year, its Swedish rival H&M in contrast saw sales in local currencies rise just 3 percent in February when adjusted for seasonality. Excluding calendar effects, they were down 1 percent. The retailer said sales including VAT rose 4 percent in local currency terms in the fiscal first quarter ended Feb. 28.
H&M, which is due to publish full first-quarter results on March 30, provided no further explanation. The retailer plans to increase its investments for 2017 despite disappointing 2016 sales and profits, currency headwinds and a difficult overall climate for apparel retail that looks set to continue this year.
H&M has put in place a new target of between 10 percent and 15 percent local-currency sales growth in 2017, replacing its previous goal based on growth in store numbers, to better reflect the importance of online sales.
Inditex registered net sales of 23.31 billion euros, or $27.79 billion, in 2016, up 11.5 percent year-on-year. Earnings before interest, tax, depreciation and amortization rose 8 percent to 5.08 billion euros, or $5.62 billion. All dollar rates are calculated at average exchange rates for the period in question.
Inditex’s strong performance will largely benefit founder Amancio Ortega, who controls a combined 59.3 percent of the group’s shares. The retailer plans to raise its dividend by 13.3 percent to 0.68 euros, or $0.72, per share, meaning Ortega will pocket 1.24 billion euros, or $1.37 billion.
The fast-fashion player is set to increase investment to 1.5 billion euros, or $1.59 billion, in 2017 from 1.4 billion euros, or $1.55 billion, in 2016, with a large portion directed to sustainable growth initiatives, including expanding its eco-efficient store base and strengthening its recycling programs.
“We will continue reinforcing the differentiation of our global flagships with very visible store openings and enlargements in prime locations. We expect a lower capital expenditure requirement for expansion. We see capital expenditure growing below space growth,” Isla said.
“In the coming year, we expect a significant addition of new space in prime locations annually, in conjunction with an increasing contribution from organic growth and online sales,” he added.
Inditex shares closed broadly flat at 31.40 euros, or $33.41, on the Madrid stock exchange. Shares in H&M fell 5 percent to 234.00 Swedish kronor, or $26.08, in Stockholm.