Slow Q1 sales but margin improves at Zara's owner

First-quarter earnings before interest, tax, depreciation and amortisation were €1.13 billion (S$1.8 billion) for Zara owner Inditex, in line with analysts' expectations.
First-quarter earnings before interest, tax, depreciation and amortisation were €1.13 billion (S$1.8 billion) for Zara owner Inditex, in line with analysts' expectations.REUTERS

Negative currency effects, cold weather weigh on growth rate

MADRID • Inditex, the world's biggest clothing retailer and owner of fashion brand Zara, reported improved profitability yesterday for the first three months of its financial year despite the dampening impact of a strong euro.

However, weak sales growth in the first quarter disappointed investors, with negative currency effects and unseasonably cold weather in Europe meaning the quarterly growth rate was a mere 2 per cent, lower than rates booked during the financial crisis.

Sales for the first six weeks of the second quarter were more robust, up 9 per cent in local currencies, as shoppers snapped up items from summer collections including striped maxi skirts and linen dresses at Zara.

Stripping out that negative currency impact, first-quarter sales growth was 7 per cent. The gross margin increased from the year-ago period, despite many analysts forecasting a fall, coming in at 58.9 per cent of total sales.

A strong euro can act as a drag on profitability for Inditex, the owner of upmarket chain Massimo Dutti and underwear store Oysho.

The group, controlled by founder Amancio Ortega, generates more than half of its sales in currencies other than the euro and then books those sales in euros when reporting results.

Inditex's centralised sourcing and distribution model also means a large chunk of its costs are in euros.

Shares in the company slipped on disappointment over the weak first-quarter sales growth, but managed to recoup some lost ground.

First-quarter earnings before interest, tax, depreciation and amortisation were €1.13 billion (S$1.8 billion), in line with analysts' expectations.

The company opened new stores in 36 markets and launched online sales in Australia and New Zealand during the period.

However, the net number of stores fell over the three months to 7,448 as the company closed smaller shops to focus on big destination-style stores that complement its online offering.

Inditex is benefiting from investments in technology that are boosting efficiency online and in stores, helping the Zara owner contend with Amazon.com's foray into the fashion aisle.

Inditex has rolled out a wave of new technology at selected Zara stores around the globe in recent months, including augmented reality and hologram displays of clothes, as it moves to erase the lines between online and in-store operations.

It plans to start operating a new 90,000 sq m distribution centre near its headquarters in Arteixo, Spain, this summer, and the company is working on a new logistics hub in the Netherlands.

Those investments will exceed €150 million, the company said.

Inditex reported a 41 per cent increase in online sales last year.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 14, 2018, with the headline 'Slow Q1 sales but margin improves at Zara's owner'. Print Edition | Subscribe