Sep 21, 2016
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Zara owner Inditex outperforms rivals again

Sep 21, 2016

Zara owner Inditex reported better than expected first-half sales and profit on Wednesday as the world's biggest clothing retailer outperformed rivals thanks to quick production times that allow it to react to changing weather and fashions.

Zara store on the Champs-Élysées in Paris, France - Inditex

Inditex has reported consistently better figures than its next biggest rival H&M (HMb.ST) in recent years, helped by its ability to get the latest trends to stores in a matter of days from factories in Europe and North Africa rather than Asia.

Items such as floral dresses, jumpsuits and over-sized sweaters helped push sales up 16 percent in local currencies in the six months to July 31. Net profit was up 8 percent at 1.26 billion euros (£1 billion), above a Reuters analysts' poll which forecast a 7 percent rise.

Mirabaud analyst Gonzalo Sanz Martin, who rates the stock "sell", said Inditex's lead over rivals was now priced in to shares that trade on 31 percent forward earnings compared with a historical average of 24.6 times and 19 times for H&M.

"We harbour no doubts as to the group's quality or visibility as well as its ability to generate recurrent cash

flow or its cash position at this time. The problem is that all of this comes at too high a price," he said.

Inditex shares, which have opened up a big premium to other major fashion retailers, dipped 0.9 percent, reacting to news of a slowdown in sales in the Aug. 1 to Sept. 18 period.

In the first weeks of its second half to Sept. 18, sales growth slowed slightly to 13 percent, but was still ahead of most analysts expectations after H&M blamed a hot second half of August for missed forecasts last week.

The figure implies growth of at least 7 percent once the effect of new store openings is stripped out, according to Societe Generale analyst Anne Critchlow, well ahead of an implied fall of 2 percent for H&M in August. H&M reports third quarter results on Sept. 30.

"There are very few short-lead time retailers. Inditex is one of them, and that makes it stand out from commoditised value fashion retailers like H&M, which are all about price and long-lead times," said Critchlow.

Inditex, whose other brands include younger fashion chain Pull&Bear and upmarket label Massimo Dutti, is known for its fast turnover by keeping its manufacturing bases close to its distribution centre in northern Spain. This allows its brands to react to trends immediately, reducing in-store markdowns and boosting profitability.

Societe Generale estimates that Inditex sources 65 percent of its products from Spain, Portugal, Turkey and North Africa, whereas most other retailers source around 80 percent of their products from Asia.

About 40 percent of Inditex's sales come from outside Europe, denting sales as emerging market currencies have fallen of late. It has also been hurt by the strong dollar, which has pushed up sourcing costs from Asia, albeit less than H&M.

Chief Executive Pablo Isla told an analyst call he expected a stable gross margin in the second half, after the measure slipped to 56.8 percent in the first half from 58.1 percent a year ago.

He said Inditex's expansion would continue to be driven by its plan to better integrate its over 10,000 stores around the world with its online operations. Inditex plans to have a presence in all European countries and Turkey by the end of January.


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