Zara-owner Inditex enjoys strong start to summer

Inditex, which owns the Zara retail clothing chain, said sales of its spring-summer collection jumped 16% over the past month, maintaining its strong run despite higher wage costs and the loss of its sizeable Russian business.

The world’s biggest fast fashion company on Wednesday reported a better-than-expected 54% rise in profit to €1.2bn for the first quarter that ended in April, exceeding analysts’ average expectations of €980m euros in a Refinitiv poll.

In-store and online sales rose 13% to €7.6bn, in line with a 13.5% increase in the first six weeks of the financial year.

The results show Inditex, whose market capitalisation exceeded €100bn for the first time last week, has managed to remain competitive while raising prices to mitigate cost pressures, including a 20% rise in average wages for shop workers in its home market of Spain.

The company said it plans to invest €1.6bn to increase gross store space by about 3% in 2023.

“We expect increased sales productivity in our stores,” the company said in a statement.

Inditex, which also owns Pull&Bear and Massimo Dutti, outperformed other retailers in 2022 with main rival H&M struggling to compete for shoppers hit by inflation.

“We recall from the global financial crisis that when consumers feel under pressure, as they do at present, it is ‘newness’ in fashion that sells best, as people prioritise spending on ‘must have’ items that will make the greatest difference to their wardrobes,” said Anne Critchlow, an analyst at Societe Generale.

Inditex shares were up 5.5% in morning trading, the highest since August 2017.

Part of Inditex’s strategy is to maintain higher prices outside the eurozone. In countries such as the US, Mexico or Saudi Arabia some clothes are up to 91% more expensive than in its home market.

Lower demand in the US caused by a tougher macro environment has been offset by less weather-affected sales in southern Europe.

Inditex closed more than 500 stores in Russia in March 2022 after Moscow’s invasion of Ukraine in February and subsequent Western sanctions. It agreed to sell the unit to UAE-based Daher Group in October.

Steady margins

Inditex’s gross margin reached a record 60.5%, showing it has been able to pass on higher prices to shoppers while rivals have seen their margins squeezed. The company expects its gross margin to remain stable in 2023.

Inditex has begun to charge for online returns in more countries with no impact on sales, the company said.

It plans to open 30 more stores in the US in two years. Analysts believe only the strongest global fashion retailers will gain market share in an environment where consumers are becoming more discerning.

“A quick look confirms my thinking that Inditex would be market share gainers in this still fragmented environment,” said Jelena Sokolova, senior equity analyst at Morningstar.

Inditex is also invested in more self-scanning checkouts and is replacing hard anti-theft tags with chips sewn into garments to avoid checkout queues.

As fast-fashion companies come under greater scrutiny for encouraging a wasteful clothing culture, Inditex said Zara’s resale service, “Zara Pre-Owned”, currently available only in the UK, will launch in France, Germany, and Spain in the second half.

Reuters