Zara Parent Inditex's Nine-Month Profit Up 20% -- 2nd Update

By David Román

MADRID--Industria de Diseño Textil SA, the retailer behind the Zara fast-fashion chain, said Thursday it plans to launch online operations in all European markets next year, as it posted third-quarter results that exceeded expectations.

Inditex, as the Spanish company is known, said net profit for the nine months ended Oct. 31 rose 20% from the same period last year to EUR2.02 billion ($2.21 billion). It didn't provide separate numbers for its fiscal third quarter, but a Wall Street Journal calculation shows third-quarter net profit rose 13% on the year to EUR854 million, compared with analysts' expectations of EUR645 million, according to FactSet.

Sales grew 15% to EUR5.32 billion, this calculation shows, as the company continued a strong pace of new store openings, adding 136 stores in the third quarter and 230 overall during the first three fiscal quarters of the year, the same amount it added in the comparable period of 2014. Inditex has 6,913 stores world-wide.

In a trading update on the company's fiscal fourth quarter, Inditex said that sales in local currencies were up 15% for the period between Nov. 1 and Dec. 3, in line with the previous nine months--a performance that, analysts say, indicates the company is on track to build on its strong recent performance during the holiday season and beyond.

"We believe that Inditex has the best business model in apparel and expect Inditex to deliver double-digit earnings growth per year over the next five years," analysts at Bernstein said in a note to investors. The brokerage rates Inditex at market perform.

Inditex didn't provide an estimate for like-for-like sales, a closely watched metric that doesn't include new stores. However, Anne Critchlow, an analyst with Société Générale, said she estimates like-for-like sales accelerated in the third quarter and grew at a rate of 11% on the year compared with 7.5% growth in the second quarter, which also exceeded expectations.

Ms. Critchlow said this growth is underpinned by Inditex's focus on value-for-money products and customer choice, notably at Zara, which accounts for two-thirds of company sales. SocGen rates Inditex at hold.

Meanwhile, analysts anticipate Inditex's plan to expand its online retail operation to all 35 European markets where it operates, from the current 22, will resonate with younger shoppers who increasingly turn to the Internet for their purchases.

At the same time, online operations provide Inditex with a safety net against low-cost rivals such as Primark, a unit of Associated British Foods, now making inroads in key Zara markets such as Spain. Inditex declined to provide a breakdown for online sales.

In October, Primark opened its second-largest store in the world, smack in the middle of the Madrid downtown, next door to Zara's own flagship store on Gran Vía avenue, with such success amid shoppers that riot police were called in to control the excited crowds.

John Bason, Associated British Foods' finance director, says Primark is looking to keep expanding on Spain, now among the European Union's fastest-growing economies. But he said the company has no plans to launch online operations for now--a significant hurdle for cellphone-carrying youngsters, many of whom compare prices and products online even when shopping in stores.

According to SocGen estimates, Primark's low prices can't cover the cost of operating websites and shipping products. In a recent U.K. survey, SocGen found that the cheapest basket of nine store items, or tickets, cost GBP53 ($80.46) at Primark and GBP157 at Zara, and typically sold for GBP110 in Primark and GBP293 at Zara, respectively.

"Zara ticket prices are approximately three times higher than Primark's and this helps Inditex to operate profitably online," Ms. Critchlow said.

Write to David Román at david.roman@wsj.com

(END) Dow Jones Newswires

December 10, 2015 08:15 ET (13:15 GMT)

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