Zara owner’s good half-year earnings due to locally made clothes
Inditex, which was able to reduce stock during the lockdowns, softening blows to earnings, also had a 74% surge in online orders
Madrid — Inditex’s quick-reaction strategy allowed the operator of Zara stores to reduce inventory in the middle of Covid-19 lockdowns, buoying first-half earnings.
The Spanish clothing retailer managed to reduce stock-in-trade by 19% at the end of July, taking advantage of flexible purchasing agreements that allow the company to rapidly adapt to changes in demand. That softened the blow to earnings, which exceeded analysts’ estimates even though they were less than half last year’s level. The stock rose as much as 6.7% on Wednesday morning.
The world’s largest clothing chain operator has shown steady improvement after suffering its only loss on record in the first quarter. Chair Pablo Isla is motoring on with a plan to invest about $3bn in e-commerce, renovations and new stores over the coming three years to better position Inditex when the pandemic ends.
Inditex has seen a “turning point” during the second quarter, Isla said on a call with analysts. The company can run with even lower inventory levels in the future, he said.
A 74% surge in online orders buoyed sales, and almost all shops have reopened.
Isla is navigating his most difficult year since joining the company 15 years ago. He reduced operating expenses by 21% in the first half, and revenue is gradually returning to more normal levels. While sales plummeted 72% in April, the decline was 11% in the first weeks of the third quarter.
The results come a day after H&M reported higher-than-expected quarterly earnings. Inditex’s Swedish rival has, however, been struggling to get rid of unsold garments, and its $4.6bn inventory position was at a record proportion of sales at the end of May.
The owner of Zara relies on production in Spain and nearby countries for the bulk of its garments, giving it more flexibility in adjusting orders because of the proximity to suppliers. H&M relies much more on clothes made in Asia, which need to be ordered longer in advance because they take months to be shipped to their final destinations.
Consumers have been shifting to buy more informal clothing as many employees work from home, and that was reflected in Inditex’s results. Massimo Dutti, which sells office wear, was the chain that had the biggest drop in first-half sales, reporting a 42% decline. Oysho, which sells lingerie and yoga wear, had the smallest drop, at 31%.
Gross margin should improve in the second half and should be stable over the full year, Isla said.
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